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  • Writer's pictureRobert Baharian

The End of Rate Hikes?

Central banks around the world are hiking rates. This is not insightful. The RBA just hiked rates by 50 basis points to bring the Australian cash rate up to 2.35%. Remember when the RBA weren't going to hike rates until 2024 - ha! How the market laughs in your face.


This is not an Australian phenomenon, in fact, the net number of central banks around the world turned positive. The number of central banks hiking rates is now higher than the number that were hiking in 2008, when central banks attempted to rein in the massive liquidity fueling the global housing bubble. But now, signs are beginning to emerge that the trend in rate hikes may be nearing a peak, as can be seen in the below chart, which may be welcome news for investors. I came across this great piece from Schwab.


The Central Bank of Brazil (BCB) and the Czech National Bank (CNB) were the first major emerging market central banks to start tightening policy last year and lead the rush of other emerging market and developed market central banks to raise rates. They both now appear to be signaling that their respective rates have peaked.

  • In Brazil, the August 3 statement from the central bank stated that it will evaluate the need for a "residual hike of a smaller magnitude" after its 50-basis-point (bp) hike announced that day. The BNB is effectively signaling that hikes were likely over but that they were open to evaluating the need for one additional, smaller, and likely final, 25 bp hike at the September meeting.

  • In the Czech Republic, the central bank held rates steady on August 3 after a series of hikes totaling 675 bps and stated that "rates are at a level that is dampening domestic demand pressures." This suggests a view that any further rate hikes are unlikely to be effective in reining in inflation in the near term as growth is expected to weaken in the Czech Republic and around the world.

Following the signs of an end to rate hikes among those central banks that led the rate hikes, the market now expects the major central banks, such as the U.S. Federal Reserve (Fed), European Central Bank (ECB), and Bank of England (BoE), may end their rate hikes in the first half of next year.


Following the signs of an end to rate hikes among those central banks that led the rate hikes, the market now expects the major central banks, such as the U.S. Federal Reserve (Fed), European Central Bank (ECB), and Bank of England (BoE), may end their rate hikes in the first half of next year.


The market expects the peak in rates to be followed by a gradual decline in policy rates beginning in the first half of 2023. But looking back, historically declines in policy rates haven't been gradual. In fact, over the past 20 years, the turn from hikes to cuts has tended to be abrupt, often in response to economic recessions. Rapid moves from hikes to cuts and back again was also the case during the inflationary-stubborn 1970s, for central banks when monetary policy was much different than today.

Schwab go on to point out these facts about rate hikes/cuts and stocks:


An end to central bank rate hikes may help to turn around the losses seen this year in stock markets in major countries around the world.

  • In the U.S., history shows that after each of the last rate hikes by the Fed, the S&P 500 Index posted, on average, a gain of almost 15% over the next 12 months since 1970, with gains in eight of the 11 one-year periods following each peak in the federal funds rate.

  • In the United Kingdom, after each of the last BoE rate hikes, the MSCI United Kingdom Index rose on average 9.4% over the next 12 months, posting gains in seven of the 11 one-year periods following each peak in the bank rate.

  • In Europe, the ECB and its predecessor the German Bundesbank moved the policy rate relatively less often and less dramatically over the past 50 years. After each of the last rate hikes, the Europe STOXX 600 Index was flat (+0.1%) on average over the following 12 months, posting gains in only three of the seven periods. Historically, the central banks of Europe tended to take more gradual and longer paths for their rate hikes, with cycles often ending by an unrelated development such as the European Debt Crisis in 2011 or the U.S.-led Great Financial Crisis in 2008 and Dot-Com bubble bursting in 2000. This contributed to the weaker post-rate-hike performance. With the ECB adopting an approach to monetary policy similar to the U.S. and U.K. in recent years, the stock market outcome may become more favorable.

I feel like we're a lot close to where we need to be than not. Rate hikes are like drinking alcohol, it takes a while for it to flow through the blood stream, but after a few, and give it some time, you're well on your way. The RBA initially raised rates in May of 2022 by 0.25% points, then another 4 hikes at 0.50% points to get us to where we are today. Rate hikes in Australia (not sure about the rest of the world) take about 6 months to flow through the economy. Which brings us to October of 2022 to start to feel the impact of the first rate hike. The first rate hike! I'd argue we've started to feel the impact in different ways, just take a look at property prices - I won't go into the flow on affect of that. And we haven't really felt the impact of the most recent rate hikes, they really haven't had the opportunity to work their way through the system.


If Schwab's analysis is anything to go by, we'll keep hiking rates, then all of a sudden the rate hikes from months earlier will kick in, cause some sort of economic disaster, and central banks will yet again be on the back foot cutting rates. Central banks needs to raise rates to cut rates. Sophisticated, yet so simple.


My co-host Matt Rigby and I talk more about this in last week's The Wide Lens podcast.

You can also listen to the podcast on Spotify or wherever else you listen to your podcasts.



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