Saturday, 6 July 2019

Interest Rates: Central Bank Rate Spreads Highest in Over 20 Years

Equally as curious as the new negative interest rate phenomenon is the generous spreads between official Central Bank Policy Rates.

Central Bank Rates:

USD <2.50%
CAD 1.75%
GBP 0.75%
JPY -0.10%
EUR -0.36%

USD-EUR spread = 286bps.

Points of note:

1. The Fed leads the pack (first to act) in terms of interest rate policy, followed by Canada then Britain. Fed policy is a good predictor of global central bank policy.

2. Beginning 2017, The Fed hikes interest rates 8 times, the BOC 5 times and the BOE 2 times; while the BOJ leaves rates unchanged and the ECB actually cuts interest rates further into negative territory.

3. The spread between Central Bank Policy Rates is widest in over 20 years. Post-2008 "central bank policy coordination," is the unofficial policy mantra among policymakers, which implies an eventual conversion of interest rates. This means either The Fed cuts interest rates by about 250bps, or the ECB and BOE hike by a similar amount.

One thing is for sure: interest rate divergences this wide won't last forever.

USD, CAD, GBP, BOJ, & ECB Relative Interest Rate Performance

USD (Blue) vs EUR (Beige) Interest Rate Performance - 275bps Spread