Races of rates of central banks
The financiers of most countries of the world have not yet found anything better than to raise their interest rates in order to cool down consumer demand and thereby bring down inflation rates.
But this rather old technique may not work this time. After all, in many ways, the cause of inflation today lies not only in the disrupted logistics after the pandemic, and not only in the classical monetary plane, but also in the geopolitical plane. Including in Russia’s war against Ukraine, and the subsequent increase in energy and food prices.
But both the ECB and the US Fed decided to start a new race — a race of interest rates. And with the risk of going overboard again, as was the case with the “quantitative easing” policy. And this evening, the US Fed will announce its decision regarding another increase in interest rates.
According to my forecast, it will be an increase of 0.75% per annum, that is, to the levels of 3.00% -3.25% per annum, respectively.
At the time of writing the article, most of the experts polled by the world’s economic publications speak of such a rate hike by the Fed, but there are also those who still believe that the growth may be a record 1% per year. But in this case, the American economy is almost guaranteed to be in recession starting in 2023.
Coupled with the very likely next ECB rate hike on October 20, 2022 (forecast of another 0.5% annual growth) and the problems of a cooling Chinese economy, this threatens to turn into a global global crisis, with threats and consequences worse than the collapse of the global economy in 2008 .
Three options for decisions by the US Fed on September 20-21
1. The scenario of the Fed rate increase by 0.75% has already been laid by traders in the prices of raw materials, stock and currency markets of the world, as well as in the prices of precious metals. But there are always risks that something will go wrong. Therefore, when the decisions of the US Fed are announced, short-term rallies in all financial and commodity markets await us. Including EUR/USD in what I believe to be a range of $0.98 to $1.02 per euro, and gold in a range of $1,635 to $1,690 per ounce.
2. It will be much hotter in the markets if the Fed nevertheless decides to surprise everyone and immediately raises the interest rate by 1% per annum. In this case, the euro will not recover at this stage. At least until the ECB meeting in October, where the European regulator will be forced to get involved in a new round of global rate hikes. But already in much larger than the currently planned 0.5% annual volume of key rate increases.
And against the background of problems with GDP growth indicators of the EU countries and the still existing gas dependence on Russia, it can be expected that the ratio of the euro/dollar pair will break through the level of 0.95-0.97 dollars per euro. And gold in this case may sink to the levels of about 1,600-1,630 dollars per ounce in the short term.
The American currency will become too attractive for all global investors and speculators as a profitable instrument compared to other assets.
Although such a rate increase to fight inflation will have a very painful effect on the financial condition of American families and businesses, and will also significantly increase unemployment. Such a development will be very dangerous for the US economy in the perspective of 1-2 years, given that rate hikes have a certain delayed effect.
A high dollar will hit America’s exports and the US real estate market, which is already beginning to show signs of impending stagnation, with the subsequent bursting of a price bubble without active fueling by cheap mortgages. And mortgage rates are oriented precisely to the interest rates of the Fed and the real estate market in the USA is one of the main locomotives of the economy of the States.
3. But if the US Fed decides to finally undermine the markets (which the author of the article does not believe), then it can limit itself to raising the rate by only a modest 0.25%-0.5% per annum with hints of a more dovish policy in the near future. No one expects such a decision from the Fed.
What to expect if this happens:
- colossal currency rallies on the euro/dollar pair with significant fluctuations and only then the final level of the pair in the coming days in the range of 1.00-1.025 dollars per euro;
- the rise of gold quotations again to the levels of $ 1700−1750 per ounce and higher;
- significant changes in the market of shares and bonds, as well as indicators of stock indices.
- in the future, the euro will have a real chance to establish itself above parity with the dollar and aim for a quick return of its positions to the corridor from 1.035 to 1.05 dollars already in the winter of this year, even taking into account the negative energy problems in Europe.
Why is this US Fed meeting so important for Ukrainians and Ukraine
For ordinary citizens. The official rate of the euro on September 20 was 36.5064 hryvnias, and the “frozen” rate of the dollar by the National Bank was 36.5686 hryvnias. On the cash market, the dollar is currently sold in the range of 42.30-42.45 hryvnias, and the euro at 41.30-41.50 hryvnias. That is, fluctuations of the euro/dollar pair even by 1 euro cent are at least 40 kopecks.
Therefore, the rally in the euro/dollar pair on the international market, provoked by the decisions of the US Fed, even within the range of 1-2 euro cents, is able to significantly “move” the exchange rates of financial companies and banks by at least 40-80 kopecks.
There is no direct relationship between the rates of the American and European regulators and the quotations of these currencies in Ukraine. But, in the end, such quotations are tied to the behavior of the euro/dollar pair on international markets. And therefore, without taking into account the influence of purely Ukrainian military and economic factors and based only on the aforementioned options for raising the US Fed rate, the cash euro in Ukraine in the coming days after the decision of the Fed may be in the following corridors:
- for an increase in rates by the Federal Reserve by 0.25%-0.5% per annum – the euro corridor in banks is from 39.50 to 43.55 hryvnias, and in exchange offices of financial companies the buying and selling corridor is from 42 to 43.50 hryvnias;
- for an increase in interest rates by 0.75% per annum — the euro corridor in banks is from 38.70 to 43.35 hryvnias, and in exchange offices of financial companies the buying and selling corridor is from 41.15 to 43.30 hryvnias;
- for an immediate increase in interest rates by 1% per annum, the euro corridor in banks is from 37.50 to 41.25 hryvnias, and in exchange offices of financial companies, the buying and selling corridor is from 39.90 to 41.20 hryvnias.
For business and the state. A significant amount of Ukraine’s external loans and loans of Ukrainian companies are “tied” in dollars to the Federal Reserve interest rate, and in euros to the ECB rate. However, even taking into account the country risk adjustment. In peacetime, the yields on securities of all Ukrainian issuers are also based on them.
During the war, such a correction of the cost of raising funds for Ukraine and local companies increases many times. Therefore, an increase in the rates of the Federal Reserve and the ECB is always bad for our country, as it leads to an increase in the cost of servicing external debts for both the state and private companies.
In addition, Ukraine currently has only a corridor for the non-cash dollar in the range of 36.5686-36.9343 hryvnias. But the exchange rate of the cashless euro constantly reacts to the behavior of the euro/dollar pair. Therefore, if we assume the same three options for the decision of the US Fed on the interest rate and my forecast of the behavior of the pair / euro dollar, then we can talk about the following reaction of the interbank to the change in the Fed rate:
- in the case of an increase in interest rates by the Federal Reserve by 0.25%-0.5% per annum, the euro interbank corridor will be from 36.57 to 37.86 hryvnias;
- for an increase in rates by 0.75% per annum — a corridor of cashless euros at auctions from 36.20 to 37.67 hryvnias;
- for an immediate increase in rates by 1% per annum — the interbank euro corridor will be from 34.74 to 35.83 hryvnias.
He writes on the following topics: Currency, securities, investment projects, lending, international currency and stock markets, financial startups