Move fast & break things/ Chinese decoupling/ Brexit & Northern Ireland/ Global supply chains easing?/ Israel

Move fast & break things: central bank edition

Since the start of 2022, US policy rates have increased by 450bp, in the Eurozone by 300bp, in the UK by 390bp, and in New Zealand by 400bp.  This speed and materiality of increase exceeds that in the years prior to the global financial crisis.

So far, most advanced economies have largely taken this in their stride.  GDP growth rates and labour markets have been resilient, even if some interest rate sensitive sectors (like real estate) have weakened.  But we may be reaching a point where things begin to break.

This would not be surprising.  Public and private sector debt levels are at very high levels across advanced economies, and growth models of firms and countries have been deeply shaped by the low interest rate environment of the past 15 years. Our 2023 outlook noted that ‘The persistently expensive cost of money will provoke and discover many macro risks’.

Indeed, the blow-up of Silicon Valley Bank (SVB) may be appropriate given that the VC sector benefited disproportionately from easy money over the past decade.  It is striking that SVB’s share price had shrunk by almost 2/3 in the 15 months before last week, in tight correlation with an increasing 10 year government bond yield. SVB’s particular issues were idiosyncratic, as are Credit Suisse’s, but more interest rate-related stresses will emerge across the financial system and beyond.

Trade-offs between inflation, financial stability, and the real economy will become increasingly evident in a higher interest rate environment.  My assessment has long been that that high debt levels will constrain the ability of central banks to raise rates.  The challenge is that core inflation remains elevated in the US, the EU, and elsewhere, as this week’s data has shown again.

Read the full note at: https://davidskilling.substack.com/p/global-briefing-move-fast-and-break