Traders and investors around the world are wondering when the U.S. Federal Reserve, the U.K.’s Bank of England, and other big central banks around the world are going to raise interest rates.
For BCA Research’s Dhaval Joshi, a better question might be how long those rates will last before they must come down again.
In an August note, which we heard about via FT Alphaville’s Cardiff Garcia, Joshi points out that at least four monetary authorities — those of Sweden, the Eurozone, Norway and Australia — have attempted to raise rates following the Great Recession, only to have to lower them once again.
“…With most developed economies (and now many developing economies too) up to their necks in debt, the scope for a further sustained credit expansion is automatically cut off, irrespective of what policymakers desperately try to do,” he writes. “The elevated level of debt also means that the ability to absorb higher interest rates is extremely limited. Note that those advanced economies that have tried to raise rates since 2008 have had to reverse course very quickly.”
For Sweden, Joshi notes that when the Riksbank started tightening again in 2010, the interest rate couldn’t move beyond 2% before the central bank had to rapidly backtrack.
“The volte-face was because the modest 1.75% tightening has had a devastating impact,” he says. “The Swedish economy has tipped into outright deflation, and the Riksbank has cut the repo rate back to the zero bound.
“Similarly, in Norway, the central bank tightened by just 1% and then quickly loosened again. Even in Australia — which is relatively immune to the euro area’s debt crisis, and which has not seen a recession for 25 years — the Reserve Bank of Australia marched interest rates up by only 1.75% before marching them down again.”
Unlike some of its peers, the Fed has kept its benchmark rate unchanged at 0.00-0.25% since December 2008. The last thing it wants to do is raise rates and then immediately reverse course.