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THE JOURNEY FROM DENIAL TO REALITY

Harvest Global Markets :

The start of the year 2022 brought a disaster with itself to the world. Russian-Ukraine Invasion posed critical energy and food shocks to the world, which caused global prices of food & fuel to soar. Initially, the world had difficulty swallowing the bitter pill of inflation, and many central banks thought it transitory. However, by March, many significant world economies had to step in after witnessing their inflation rates at a four-decade high. As of now, for every central bank that is slashing its interest rates, 25 central banks are increasing the rates- a ratio never witnessed after the 1980s.

September 2022 will be a memorable month in monetary policy history, as every central bank seems to join the herd of fierce interest rate hikes. The month was a period of “Brutal Awakening” for the world. A total of 10 central banks increased their interest rates by an aggregate of 600 basis points during mid-September.

On September 8th, European Central Bank announced a 75 basis points hike in its central rate, and the current rate of the Eurozone stands at 1.25%. After the release of inflation data for September 30th, Europe’s yearly inflation increased to 10.00% from 9.1%. The uncontrollable inflation of Europe increased the probability of further aggressive monetary policy. The market anticipates that by June 2023, ECB’s rate will likely peak at 2.5%.

Moving on to Federal Bank, although the Fed announcement of a 75 basis point increase was not a surprise for the market, the dollar index soared to another twenty-year high of 114.75. The volatility is mainly caused by the statements of Jerome Powel and the estimation that the Fed rate will linger around 4.75% by the end of 2023. U.S economy has now begun to depict signs of harsh monetary policy as its two consecutive quarterly GDPs are already negative, and housing prices have also started to decline. The irony of the situation is that the Federal Bank’s monetary policy impacts not only the U.S but also the countries worldwide. The surging dollar has not only impacted the emerging economies by booming the value of their debts but has also hurt the more affluent countries. Euro has dropped below parity for the first time after launch, and Yen and Yuan witnessed their twenty-year lows. Thus, a peaking dollar is always a piece of bad news for the rest of the world.

Furthermore, GBP slumped to its ever lowest to 1.0324 not only because of the soaring USD but also after England announced a tax cut policy. The market viewed the news as an economic crisis for the country as the last two budgets of England were already in deficit, and the current unemployment rate of England, i.e., 3.60%, portrays a tight labor market; thus, expansionary fiscal policy could have posed a threat for hyperinflation. After extreme criticism, England announced a “U-Turn” from its decision to cut taxes.

Even the so-called Iron Nation-Japan, adamant about its negative interest rates, had to intervene in the market to save its currency after USD-JPY plummeted to ~$140.

To save their currency and to restrict imported inflation, the other countries have no other option but to increase their inter-bank rates. What the global economies are failing to realize is that a surge in the interest rate of one country poses a globalized impact as growing rates impact not only the national demand but also the demand in the international market. Thus, the economies can slow down more than expected.

The markets have just woken up to reality. There is still more to come.

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