Global Monetary Policy Tightening

With the global economic downturn well and truly behind us, Western economies outside of the Eurozone are looking to accelerate the tightening of monetary policy. At the time of writing this article, the U.S., Canada and the UK are all operating at inflation rates upwards of 2.0%, ramping up the pressure on the heads of the respective monetary committees.

 

All three nations have increased their lending rates within the last year. However, analysts are predicting further increases towards the end of 2018.

 

U.S.

In an attempt to combat rising inflation, since the start of 2017, the FED has implemented five rate hikes. Despite the most recent hike in June, the markets are still anticipating two more increases later this year. Several sources are also forecasting the pace of the further increases to double.

With there being minimal rationale for leaving rates lower or increasing them more gradually, Fitch forecast the fund’s rate to be upwards of 3.0% by Autumn next year.

Jan - 16 Now Dec -19 Forecast
0.50% 2.00% 3.00%
Annual cost increase on $25m balance $625k

 

Canada

Although Canadian inflation has broken the 2.0% mark, the interest rate has been held constant at 1.25%. In response, Governor Stephen Poloz has come under increasing scrutiny as his much more reserved approach does not match that of the U.S. He has referred to recent inflationary movements as a spike and that monetary policy should not be a mechanical response.

With the Canadian economy in good shape, many economists are predicting a succession of increases in the coming years.

Jan – 16 Now Dec -19 Forecast
0.50% 1.25% 2.50%
Annual cost increase on $25m balance $500k

 

UK

Recently UK inflation has fallen to its lowest in a year. Nevertheless, the 2.5% achieved in March is still above the 2.0% target. Most economists still see a rise in the interest rates inevitable; however, the pace at which this will occur has been brought into question.

If first-quarter economic growth has not been stifled by the uncertainty surrounding Brexit or the November increase, then the case to increase interest rates remains strong. An increase to 0.75% appears likely within the next few months.

Jan - 16 Now Dec -19 Forecast
0.50% 0.50% 1.00%
Annual cost increase on $25m balance £125k

 

With cash costs destined to increase exponentially, as a result of contractionary monetary policy, CMS’ whitepaper on The Four Pillars of Effective Cash Management highlights the opportunity to alleviate millions from your cash balance.

 

 

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