Financial Analysis

Era of Cheap Funding is Over

In last 2 days the financial market went through a series of central Bank meetings where tough decisions were taken to end the bond buying programs and increase the interest rates. The central banks have been forced to increase the interest rate and curtail the bond buying program as inflation has hit multi year high in all the developed economies

Rising Interest Rates

US Interest Rate

Federal Reserve officials intensified their battle against the hottest inflation in a generation by shifting to end their asset-buying program earlier and signaling they favor raising interest rates in 2022 at a faster pace than expected. Heralding one of the most hawkish policy pivots in years, the central bank said Wednesday it will double the pace at which it’s scaling back purchases of Treasuries and mortgage-backed securities to $30 billion a month, putting it on track to conclude the program in early 2022, rather than mid-year as initially planned.

The new projections also showed policy makers see another three increases as appropriate in 2023 and two more in 2024, bringing the funds rate to 2.1% by the end of that year.

European Interest Rate

The European Central Bank further cut its bond purchases on Thursday but vowed to continue its unprecedented monetary policy support for the euro zone economy into 2022.

The ECB left its benchmark refinancing rate unchanged at 0%, while the rate on its marginal lending facility remained at 0.25% and the rate on its deposit facility was kept at -0.5%, in line with expectations.

Bond buying under its 1.85 trillion euros ($2.19 trillion) Pandemic Emergency Purchase Programme, or PEPP, which is due to end in March 2022, will be cut next quarter as the scheme winds down.

United Kingdom Interest Rate

The Bank of England on Thursday became the world’s first major central bank to raise interest rates since the coronavirus pandemic hammered the global economy, and warned inflation was likely to hit 6% in April – three times its target level. The nine-member Monetary Policy Committee voted 8-1 to raise Bank Rate to 0.25% from 0.1%. economist expect another rise in Bank Rate to 0.5% by March and to 1% by September.

Japan Interest Rate

The Bank of Japan kept monetary policy ultra-loose on Friday but dialed back emergency pandemic-funding, less than 48 hours after the U.S. Federal Reserve signaled an imminent end to stimulus as policymakers respond to soaring global inflation.

The BOJ’s decision, underpinned by cautious optimism that the economic damage wrought by coronavirus crisis is gradually healing, puts it in line with major central banks’ moves to phase out crisis-mode policies.

Rising Inflation

US Inflation

US inflation rate rose 6.8% in 2021, the highest increase since 1982.  while inflation has been rising, the unemployment rate has remained low and wages have been increasing. And while consumer confidence has dropped because of inflation, spending has been strong with retail sales rising in October.

European Inflation

Inflation across the 19-member eurozone soared to 4.9% in November, outstripping City forecasts. High gas prices and the cost of imported goods were blamed for the inflationary surge. Energy prices, including oil and gas, jumped 27% from November 2020. France suffered a 3.4% inflation increase, its highest in a decade, but it was in Germany among the bloc’s largest economies where prices rocketed, taking the inflation rate to 6%. In Estonia, the inflation rate jumped 8.4%, while in Lithuania it reached 9.3%.

Inflation in United Kingdom

The UK’s Consumer Prices Index (CPI) 12-month rate soared to 5.1 per cent in November, hitting the highest level since September 2011. Increases in the price of clothing, auto fuel and second-hand cars drove consumer prices up 5.1% from a year earlier, according to data released on Wednesday. Core inflation, which strips out energy and other volatile items, climbed to 4%, the highest since 1992.