Remember last year, central banks were often using the word ‘transitory’? It’s not a word we hear, now. 2022 was the year when the sheer incompetence of modern day central banking became all too obvious. Having held the cost of money at close to zero for well over a decade, economic reality crashed through the door and didn’t stop there. All central banks are now raising rates (into a recession) not because they want to but because they have no choice. In 2022, UK base rate increased from 0.25% to 3.5%. It was raised on 8 occasions, the greatest absolute increase being November’s 0.75%. When every Monetary Policy Committee meeting yielded higher rates, it neatly illustrates just how inept the management of monetary policy has been.
Some are now expecting a US Federal Reserve ‘pivot’: meaning, the pace of increases will at least reduce or potentially even reverse. However, the minutes of December’s meeting noted “no participants anticipated it would be appropriate to begin reducing the federal funds rate target in 2023. In view of persistent and unacceptably high levels of inflation, several participants commented that historical experience cautioned against prematurely loosening monetary policy”. None of which means it couldn’t happen; the words of central bankers can melt like spring snow but it is our belief the Fed’s bark will be much worse that its bite when it comes to fighting inflation. However, with interest rates still steeply negative (inflation being much higher than base rate), there’s a lot more to do before rates can credibly be reduced. All of which means we expect the economic background to remain problematic for some time yet.
