“Whilst higher rates seem to be the new reality and inflation remains stubbornly above medium-term target, Baltic indices managed to step on China’s positive momentum of late and take a much-needed breather.”
"The dry bulk market spent most part of the thirty-eighth trading week trying to understand which narrative to follow. On the one hand, most of the major central banks reasserted their commitments to tame a galloping inflation, stressing that a painless way to achieve this goal might not be on the table anymore. On the other hand, hopes of more stimulus to shore up China’s Covid-hit economy added to the buoyant mood of late. With both sides having, in fact, a wellsupported story to narrate, Baltic forward values enjoyed a bumpy ride, with assessments changing constantly direction. As one would rationally expect market sentiment followed closely this carnival ride, ebbing and flowing in tandem." was the opening paragraph of Doric's Weekly Insight twelve months ago. Fifty-two weeks later, not many things have changed materially. Whilst the so-called "higher for longer" mantra is now the official stance of the majority of central banks across the globe, hopes of extra stimulus to shore up the feeble post-covid Chinese economic recovery were kept high.
On the central bank front, Fed reiterated its commitment to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent. In determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. Additionally, policymakers bolstered their hawkish stance with a further rate increase projected by the end of the year and monetary policy forecasts kept significantly tighter through 2024 than previously expected.
In tandem, the Bank of England’s Monetary Policy Committee sets monetary policy to meet the 2 percent inflation target, and in a way that helps to sustain growth and employment. At its meeting ending on 20 September 2023, the MPC voted by a majority of 5-4 to maintain Bank Rate at 5.25 percent. Four members preferred to increase Bank Rate by 0.25 percentage points, to 5.5 percent. "We will need to keep interest rates high enough for long enough to ensure that we get the job done," Bank of England Governor Andrew Bailey stressed this Thursday after policymakers narrowly decided to hold its main interest rate unchanged.
In Europe, European Central Bank’s President Christine Lagarde reiterated last week that further interest rate hikes for the 20 country euro zone could not be ruled out. Inflation continues to decline but is still expected to remain too high for too long, according to the ECB. The Governing Council is determined to ensure that inflation returns to its 2 percent medium-term target in a timely manner. In order to reinforce progress towards its target, the Governing Council decided to raise the three key ECB interest rates by 25 basis points.
Other central banks were also tuned in to this Hawkish tone. In particular, the Governing Council of Bank of Canada reached a consensus to keep the policy rate at 5 percent. However, they stressed that their decision should not be misinterpreted as a sign that policy tightening had ended and that lower interest rates would follow. Norges Bank's committee for monetary policy and financial stability decided at its meeting on 20 September to raise the key interest rate from 4.0 to 4.25 percent. We will probably raise the key interest rate once more, most likely in December, says Central Bank Governor Ida Wolden Bache. The South African Reserve Bank held its key rate steady, but policymakers cited continued risks to the inflation outlook. In the Far East, Taiwan's central bank decided to maintain interest rates at their previous levels, but flagged continued tight policy.
At the same time as higher interest rates seem to be a necessity in order to further slow down demand and ease upward pressures on prices, an East-West divergence in central bank actions became apparent. In a policy statement, the Bank of Japan said it would maintain short-term interest rates at -0.1 percent, and cap the 10- year Japanese government bond yield around zero. "With extremely high uncertainties surrounding economies and financial markets at home and abroad, the Bank will patiently continue with monetary easing, while nimbly responding to developments in economic activity and prices as well as financial conditions," the Bank of Japan said in its policy statement. On the same wavelength, China kept benchmark lending rates unchanged on Wednesday, in line with expectations, as fresh signs of economic stabilisation and a weakening yuan reduced the need for immediate monetary easing.
Whilst higher rates seem to be the new reality and inflation remains stubbornly above medium-term target, Baltic indices managed to step on China’s positive momentum of late and take a much-needed breather.
Data source: Doric