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Closing in on terminal rates


Abounding signals and indicators of weakening economies and lower consumer price inflation (CPI) are appearing, while supply chain disruptions/pressures are easing. And although central banks continued to increase interest rates at an aggressive pace in November, it appears that interest rates are approaching its terminal points, suggesting both a shift to smaller rate increases going forward, as well as reaching terminal points in Q1 2023.

On supply chain pressures, the New York Federal Reserve’s Global Supply Chain Pressure Index declined sharply though stalling in October. It used to be more than four standard deviations away from the global average in December 2021 but is now one standard deviation from the average. With world demand slowing, supply of goods in shortage should catch up in 2023, relieving some pressure on CPI.

In the US, the Federal Reserve again raised interest rates by 75 basis points (beginning of November). Since then, CPI slowed significantly to 7.7% in October from 8.2% in September. By the end of November, Federal Reserve chair, Jerome Powell, said it is time to shift the emphasis from the pace of rate hikes to how much more rates needed to be raised to control CPI, and for how long policy should be restrictive before relaxing. Consequently, the next rate hike (in December) is expected to be 50 basis points, while, if the labour market starts cooling, the terminal rate may be below 5% (currently 4%), but not higher than 5.125% (suggesting no rate hikes beyond Q1 2023). Powell reiterated a “soft landing” in the US is still possible, suggesting a shallow recession.

In Europe, November CPI fell from 10.6% in October to 10.0%. The deceleration was mainly driven by a 1.9% monthly decline in energy prices (now at 34.9% from 41.5%). However, both core goods (unchanged at 6.1%) and services (now 4.2% vs 4.3%) remained high, while food CPI continued accelerating to 13.6%. These numbers suggest that the CPI peak was reached in October, but that stickiness in core CPI will prevent a sharp fall in 2023. The European Central Bank (ECB) may therefore step down its rate hikes from 75 basis points to 50 basis points at its December meeting – and announce a start to quantitative tightening. Two more rate hikes of 25 basis points each in February and March may see a terminal rate of 2.5%.

In the UK, CPI increased to 11.1% and the Bank of England raised interest rates by 75 basis points in November. Another increase of 50 basis points in December is expected. The terminal rate is expected at 4% (current rate is 3%), meaning another rate hike of 50 basis points early next year.


China’s economy is still slowing (PMI fell to below 50 points) on the back of continuous COVID-19 restrictions. Analysts’ expectations are for economic growth to underperform in the near term, as The Party Congress’ decision to refocus on economic growth and assist the housing market should only start bearing fruit in the second half of next year.

In South Africa, the South African Reserve Bank (SARB) again raised interest rates by 75 basis points. The Monetary Policy Committee was extremely hawkish in a feedback session with analysts. This suggests a 50-basis point increase in interest rates in January, and possibly 25-basis points in March 2023. In the meantime, an independent panel appointed to look into the Phala-Phala issue found pres. Ramaphosa may have violated the Constitution. However, it is expected the ANC will support him at a parliamentary hearing, which should prevent him from being placed in a state of impeachment. But the Hawks may independently from parliament decide to investigate if they deem a crime may have been committed.

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