The Strategist

Real central bank interest rates

The topic of inflation and central banks' responses to it has been well covered over the past two years. However, much of the focus has been on current readings and market participants' expectations for the coming months. On the positive side, investors' long-term US inflation expectations remain very well anchored, ranging between 2.0% and 2.6% over the past 24 months.

Thomas Wille
Tempo di lettura
5 minuto
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The Federal Reserve (Fed) is likely in the final stage of its current rate hike cycle. After a hike of almost 500 basis points, it is close to its target, which in our view means a pause at a high level, not a reversal. The pause is also justified because real US policy rates – which are adjusted to take inflation into account – are now back in positive territory. Nominal policy rates are between 4.75% and 5.0%, and the Fed's preferred core inflation rate (the core PCE price index) – which excludes volatile food and energy prices – is now 4.6%. This gives the Fed more flexibility: it can now wait and see how high interest rates affect the economy, but it does not have the ability to cut rates on a large scale. As a result, the entire yield curve in the US is now in positive territory in real terms, something the euro area is still far away from.

ECB – no pause in sight

In the euro area, it does not look like the European Central Bank (ECB) will pause in the coming weeks. Core inflation continues to rise, even if the pace has slowed. We still have real policy rates around -2% in the euro area, and that's only if we take the core rate, otherwise the situation would be even more dramatic. It is also worth mentioning that investors in the euro area have been facing negative real policy interest rates since 2011, that is, since Jean-Claude Trichet was president of the ECB. Thus, while Mario Draghi headed the ECB (2011-2019), the euro area has only seen negative real interest rates, averaging -1%. We expect the ECB to have to raise rates by at least another 50 to 100 basis points in the coming months. The price pressure on consumers in the euro area is simply too high.

Gold as a real asset

The two major central banks – the Fed and the ECB – will have to continue to pursue restrictive monetary policies, even though the Fed is in the final stage of its rate hike cycle as described above. Despite the sharp rise in gold prices over the past month, the yellow metal remains overweight in our portfolios. This is partly due to its quality as a tangible asset and partly as a hedge against a possible recession and the associated increased volatility in equity markets.