Weekly Buzz: Interest rates are hitting historic highs
In manoeuvres that were largely anticipated, the Federal Reserve (the Fed) and the European Central Bank (the ECB) both raised their key interest rates last week. Continued rate hikes from these central banks, in the face of sticky inflation, have now put these rates at historic highs.
What’s going on in the US?
The Fed has hiked interest rates again after a one-time pause: this time by 0.25%. This lands the fed funds rate between 5.25-5.5%, a high not seen in over two decades. The rate sets what banks charge each other for overnight lending, and feeds down to consumer rates.
It’s a complex balancing act for the Fed, inflation has to be kept in check without hurting the US economy too much. The fact that the Fed has both raised interest rates, and left the door open for further hikes reflects the policymakers’ belief that the economy’s still running too hot – fears of a wage-price spiral (check our Jargon Buster below) fuel this belief.
While a strong US economy is encouraging (it’s a silver lining we talked about in our H2 Market Outlook), soaring interest rates will put a heavy strain on it. For now, it’s proven resilient, impressive given that rates went from near zero to above 5% in just over a year. But the question is: how long can the US economy keep rolling with the punches?
What’s going on in Europe?
Across the Atlantic, the ECB hiked its deposit rate (the rate the ECB pays to banks for holding their cash) to 3.75%, matching the all-time high set in April 2001. At the same time, it lifted its main refinancing rate (the rate banks pay when borrowing money from the ECB) to 4.25%.
A high deposit rate makes banks think twice about lending money out, since they could just park their cash with the ECB. Meanwhile, a high refinancing rate makes borrowing pricier. Combined, these interest rates slow economic activity. And that’s the idea: by putting the brakes on credit, the central bank hopes to slow the economy enough to bring inflation in check.
Compared to the US, Europe's walking an even trickier tightrope between inflation and growth. While economic activity is already slowing, core inflation is still coming in at 5.5% – more than double the ECB’s 2% target. So there’s little choice: the ECB’s policymakers have to keep hiking interest rates, despite risks of a recession.
What’s coming next?
We're likely near the interest rate ceilings for both the US and Europe. Investors are already speculating about when these central banks will start rate-cutting to respond to weakening economic growth. But whatever the conditions, staying invested with a diversified portfolio (again, shameless plug: our General Investing portfolios) means you’re set for the long haul.
This article was written in collaboration with Finimize.
🎓 Jargon Buster: Wage-price spiral
The wage-price spiral suggests a dangerous tug-of-war between businesses and workers. When wages go up, workers start spending more. In response, businesses increase prices to profit on the demand. Now, workers are hit with higher costs, and to keep up, ask for even higher wages. As the name implies, it's a continuous spiral of higher wages and prices.
✨ StashAway’s 2023 H1 Returns and H2 Outlook articles are both out now!
We’re halfway through 2023 now, and it’s been rather hectic. From mini banking sector crises in the US and Europe, to the emergence of AI hype – it’s safe to say that we’ve gone through a lot so far. But there’s no need to feel out of the loop, we’re here to shed some light:
Our Returns in the First Half of 2023 - For the first half of the year, we’ve taken the bull market by the horns, and safely. See how our portfolios have performed year-to-date June 2023.
2023 H2 Market Outlook - For the second half of the year, we’re taking a step back to look at the bigger, longer-term picture, and why we see silver linings for future returns.
✨ Featured in the app
Join our co-founder and CEO Michele Ferrario and Chief Investment Officer Stephanie Leung as they share our portfolio returns in H1 2023 and discuss the likelihood of a recession in the coming months.
🙌 We need your support
It’s official: We’ve made the shortlist 🏆 We’re thrilled to be nominated by Fintech News Malaysia for not just one, but two awards: Fintech of the Year & Top Wealthtech Startup.
Since 2018, we’ve been working to make investing more accessible to all in Malaysia – thank you for being a part of this incredible journey!
Join us and cast your vote in the Fintech Frontiers Awards by 21 Aug.
🗓️ Save the date
A survey in 2022 showed that only 12% of Malaysians are on track to early retirement. However, 55% are not sure how to get there.
Want to stay ahead of your retirement plans? Together with Employees Provident Fund (EPF) and BlackRock, we’ll explore how you can start planning retirement and learn more on:
- What to expect for your investments during your journey towards retirement
- How to stay on track with your retirement goal
- How to navigate your investments and prepare yourself through different trends from now until retirement
Join us on the evening of August 23 (Wednesday) for an in-person event with a complimentary door gift. See you there!
We thought you might.
Join the hundreds of thousands of people who are taking control of their personal finances and investments with tips and market insights delivered straight to their inboxes.