At its November meeting, the U.S. Federal Reserve maintained interest rates within a 5.25% – 5.50% range. The Bank of England did likewise, keeping its key rate at 5.25% while the European Central Bank (ECB) also opted to maintain the status quo at 4.0%. Not for the first time, we are left wondering why they nearly always move in lockstep. Is it because they genuinely believe their independent examination supports it or is it because they are so reactive they are afraid to make decisions that differ from their peers? Judging by the groupthink that saw them all believe inflation wasn’t going to be a major problem with interest rates at all time lows, you can probably guess what our answer is.
Too many organisations charged with forecasting and decision-making have lapsed into wishful thinking, rather than hard analysis. According to the International Monetary Fund (IMF), the European economy will experience a ‘soft landing’ though inflation could become deep-rooted meaning rates may need to rise further. Well, if rates need to rise further, a ‘soft landing’ would be a virtual impossibility. Or, to put it another way, inflation, higher interest rates and ‘soft landings’ are unlikely bedfellows.
As a result of central bank meddling and excessive government expenditure, just about everywhere, the economic cycle and its relationship with interest rates and inflation is wholly out of kilter. We continue to expect the supposed guardians of financial competency to come up short.
