The Fed has already done it twice, the Reserve Bank of Australia likewise, and the Bank of England leads the way with no less than four steps since the end of 2021. All the talk is of rises in interest rates. Where for years a policy of low interest rates had dominated in the major industrialised nations, now the currency guardians have done an about-turn. At its latest meeting even the European Central Bank (ECB), which had hesitated for a very long time, gave people in the eurozone the prospect of an end to negative interest rates, indicating their intention to raise the base rate by 0.25% in July. The money markets are already one step ahead, currently pricing in up to 75 basis points in increases by September. The trend can be observed on the bond market, too, where the 10-year German government bond, for example, broke through the zero line at the beginning of March and is now yielding 1.4% – its highest level in 8 years.
It is predominantly galloping inflation that is forcing central banks to pull the plug on their extremely loose monetary policy. In May prices were up 8.1% on the same month the previous year, driven primarily by the rising cost of energy. That exceeded market expectations by 40 basis points. Nor is there a rapid end in sight: the ECB’s economists are now predicting that inflation in the currency union will average 6.8% in 2022, compared with the forecast of “just” 5.1% back in March. For 2023 it is tipped to be 3.5% (previously 2.1%). Although Switzerland has so far got off relatively lightly compared with the USA and the eurozone, it is likewise unable to escape the pressure on prices. In May prices here grew by a surprisingly strong 2.9% on the same month the previous year, corresponding to the highest increase since September 208. The market had expected a rise of only 2.6%.
This is now the fourth month in a row that inflation has been above the target range of 0% to 2% pursued by the Swiss National Bank (SNB). It will be interesting, therefore, to see how the team around chairman Thomas Jordan responds to the higher rents and rising prices for food and heating oil. At minus 0.75%, the SNB currently has the world's lowest base rate. Just in March the SNB had again confirmed its expansive monetary policy of negative base rates combined with possible intervention on the currency markets. On 16 June (after we went to press) it issued the latest monetary policy assessment with a decision on interest rates. SNB vice-chairman Fritz Zurbrügg had already made it clear in advance of the meeting that the national bank would take the stubbornness of inflation into account when determining its future monetary policy.
A glance at the bond markets suggests that it should not be long until the SNB, too, turns on the money tap. A few days ago the yield on the 10-year Swiss Confederation bond, which was still in negative territory at the start of the year, crossed the 1% barrier again for the first time since the beginning of 2014. This trend is evident across all durations, with even bonds having a one-year term yielding a positive return again since the start of July. The market is currently reckoning on a further hike to 1.8% by the end of September, an increase of around 77 basis points. Ultimately, the rise in domestic capital market returns heralds a new chapter for investors.
Source: Bundesamt für Statistik BFS, World Government Bonds
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