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Global Central Bank Interest Rates at Trader’s Narrative

Global Central Bank Interest Rates

Speaking of monetary policy, I thought it would be interesting to look at the global central banks. Here is a chart for six of them for the past 10 years: European Central Bank (ECB), Bank of Canada, US Fed, Reserve Bank of Australia, Riksbank (Sweden), and the Bank of England (EDIT: after a request I added Japan).

global central bank interest rates

Not surprisingly, they more or less move in synch with each other. Sometimes even cutting rates in quick succession to catch up with the leader. The outlier in this group is Australia. Not only did they take their rate higher than others, they also haven’t lowered it to match the others. But in the previous easing cycle (2001) they only came down to 4.25% also.

The Fed was the first central bank to lower key interest rates. The next was the Bank of Canada. The slowest among the 6 in the chart is the European Central Bank and Australia. These laggards have tried to make up for their mistake by making some incredibly deep cuts recently. I’m especially surprised by the 0.75 cut from the ECB.

The Bank of Canada will most probably deliver a 50 basis point rate cut when they meet next week, on December 9th.

Considering the swiftness of rate cuts, their global coordination, as well as their level in comparison to previous easing cycles, we are probably close to the end of the easing cycle. But, and I hate to say this, if this time is different, then who knows if history is any kind of a guide.

At this point, it is tempting to throw out all historical templates because they have done a monumentally poor job so far. While keeping in mind the danger of thinking that “this time it is different”, we are seeing signs that the world is undergoing a dramatic downturn in economic activity.

Just today, data was released showing the largest one month increase in unemployment in the US since the 1970’s - taking the unemployment rate to 6.7%. Add to that a swan dive in consumer confidence, an implosion in Detroit, melting real estate, etc.

It is safe to say that the central banks will continue to prioritize economic growth over inflation for the moment. Especially since we may very well experience a bout of deflation.

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8 Responses to “Global Central Bank Interest Rates”  

  1. 1 bolsaspain

    Once you read this, you realize that those who are at the forefront of the economy are a few useless. Here in Europe we are mortgaged up to his neck and Mr Trichet at the rope stretched until drowned.
    It is incomprehensible.
    Excusme for my patetic english!!!

  2. 2 james

    why did you leave out Bank of Japan and the People’s Bank of China?

    one can argue that these are more important than Sweden, Australia and England as they have higher combined GDP’s and are bigger trade partners with the US, hence more intertwined with the USA hegemony dominated global economy.

  3. 3 Babak

    james, Japan would have been an outlier, even more so than Australia so I didn’t think it would be of any use. I would have included China but couldn’t find any data from their site - which looks like it could have been made by an 11 year old over a weekend.

  4. 4 james

    thats funny about china, i would have expected that.

    don’t you think your data is incomplete without outliers? I think a major problem of the current crisis, people didn’t expect the outlier. At least in Modern Portfolio Theory based investment applications/models.

  5. 5 Babak

    james, you have a point. it would round out the picture to include those two. I’ll keep looking for the data. If you run into it, let me know :)

  6. 6 Babak

    bolsaspain, I hear ya (your english is fine). The problem that the ECB has is how to manage a large bloc of countries when they are at different stages of growth. Also, you have to remember that their main target is inflation, not economic growth or employment.

  7. 7 Babak

    I added Japan - not sure how much insight it adds. Other than being a scenario to avoid.

  8. 8 james

    agree with you about wanting to avoid a ‘lost decade’ and learn from japan.

    I think it is interesting how it still seems that japan’s interest rate correlates with the rest of the world’s movements.

    Even though they are significantly less than everyone else, I wonder if a units free measure would show significant correlation between the movements of japan’s interest rate and the rest of the world’s average. Actually, I wonder what the correlation for all of the rates and the ROW average is.

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