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Last June I wrote a column in the Financial Times saying that interest rates should – and would – stay higher for longer in western economies. At that time it was not the accepted norm. It is now.
What will happen in April? Let’s first remind ourselves of some of the notable events over the last month: the UK Budget, which reflected the weakness of the economy and this in turn limited the Chancellor’s room for policy manoeuvre; China’s annual Two Sessions in which an achievable growth target of 5% was outlined for this year; the Bank of Japan’s (BOJ) decision to shift away from its negative interest rate policy (in place since 2016) and raise policy rates above zero; and the Swiss National Bank (SNB) deciding to cut policy rates and becoming the first major western economy to embark upon monetary easing.
This week’s decision by the Bank of Japan (BOJ) to hike interest rates and to move from negative to positive policy rates is a potentially monumental decision. It suggests that the BOJ thinks, finally, that the economy has turned the corner. I think it is right.
Three issues come to the fore in the wake of yesterday’s Budget. First is the fundamental challenge of Britain’s weak trend rate of growth. Second is that while the two pence cut in national insurance was welcome, it should not divert attention from the need for tax simplification and reform and that the UK’s tax take is high and still rising. Third, the challenge of low public investment, and the challenges facing non-ring-fenced departments in coming years.
Let me highlight three areas to focus on this March: the UK Budget; China’s annual Two Sessions meeting in Beijing; and the latest inflation data in western economies.
What is the new normal? Globally, financial markets are coming to terms with a new geopolitical, economic and policy landscape.
The most dramatic change is geopolitical uncertainty and the risk of a further splintering world order. Many possible paths exist, and the multiple elections this year add to these.
I warned of a pyrrhic victory over inflation. That is what we are now seeing as the UK economy contracted in the second half of last year under the weight of tight macro-economic policy. Inflation is 4% and is decelerating and likely to reach the 2% inflation target by the second quarter. Yet macroeconomic policy in terms of monetary and fiscal policy has remained too tight.
This week captured the heart of the current market debate: will it be a soft landing, or not, and with interest rates in the west having peaked, will central banks there signal a pivot to easing, or instead a continued pause?
2022 was the year of peak inflation. 2023 the year of peak interest rates. 2024 could be described as the year of peak politics, with seven of the ten most populous nations going to the polls. Thus, politics and geopolitics may never be far from the focus of markets, but at the start of the year attention has been more on monetary policy stances and in particular the speed and scale at which inflation and policy rates may fall in the US.
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