The decade following the global financial crash of 2008 heralded unprecedented economic policies. Major economies enacted a raft of policies to recover their national economies, generally termed “quantitative easing. “ These policies appeared to be temporary measures aimed at sparking growth in the world economy,
A few years later, they seemed to be the norm. Investors watch interest rates closely, and there can be a correlation between interest rate changes and stock markets. It has become a vital metric for sophisticated and ordinary stock market traders to understand. This understanding is obviously analyzed together with other macroeconomic data, important geopolitical events, exchange rates, and much more that factor into decision-making.
Why central banks kept interest rates low for years
Following the financial crash, governments aimed to spur as much economic growth as possible. Some enacted a raft of austerity measures to manage government spending. However, the consensus among major governments seemed to make cash as cheap as possible. This concept was two-pronged. One was the unprecedented printing of money by central banks to pump into the economy, while the other was low-interest rates to make borrowing money very cheap.
It is a philosophical point of debate that leads to the other. Some believe that economic factors affect interest rates more, while others think that interest rates can cause or slow economic growth. Either way, it is a vital tool in the arsenal of central banks to manage monetary policy.
The low-interest rate era helped spur employment and growth after the market crash. That meltdown saw tens of millions of jobs lost, and major corporations needed government bailouts to survive. Those that didn’t get bailouts benefited from low-cost borrowing to invest in their operations and workforce. The recovery rate was slower than many had anticipated, but there was growth throughout the years.
The UK government has been forced to enact measures in the past two months while grappling with inflation and a crashing pound. Liz Truss’s short-lived administration had sought to cut taxes but had to reverse course. Watching the next interest rate announcement by the Bank of England following the prevailing economic turmoil will be fascinating.
Rates going back up
In September, the Federal Reserve announced a third consecutive 0.75% interest rate hike. This latest hike took the interest rate to the highest level it has been in the US since 2008. The UK is also in a relatively high-interest rate climate after the Bank of England raised interest rates to a 14-year high.
In the UK, the past month was full of upheaval for the new Prime Minister, Liz Truss, as the Pound fell to record lows against the US Dollar. Major central banks are attempting to rein in historic inflation compounded by the Russia-Ukraine conflict. The timing of this war couldn’t have been worse as it came as the world is still trying to recover from the supply chain disruptions brought by the Covid-19 shutdowns.
With inflation rates above 10% for the year in many countries, interest rates are likely to remain and even go higher. The war in Eastern Europe has impacted oil prices, with Russia being one of the largest oil and gas exporters globally. Ukraine is also a major grain exporter, and its inability to export affects food prices globally.
Low-interest era likely over for the short term
The low-interest rate era that defined the 2010s is likely over. Quantitative easing looked to be a perpetual policy until the past two years’ events manifested. Inflation rates will likely remain high for the rest of the year, meaning that major central banks will maintain or raise rates further.
However, governments will be conscious of the fact that extreme interest rate hikes slow the economy too much. Nonetheless, current rates have moderated the ease of borrowing and spending money, which can cap inflation somewhat. Even if the Ukraine conflict is resloved soon, it will take months for the effects to taper. Therefore, it is fair to expect relatively higher interest rates for the coming few months.