Good afternoon and welcome to another episode of BondTV. I’m Leslie Clark, and we’re checking in on the most recent interest rate announcements by the world’s leading central banks. Although the general trend had been towards easing, the recent outbreak of war in the Middle East has led to concerns about the trajectory of inflation. In a fresh batch of recent rate announcements, the message from central bankers was a consistent, “Hold”. Attacks on energy infrastructure and the closing of the Strait of Hormuz have impacted oil, LNG, and fertilizers, as well as global freight rates and insurance. The impact on global yield curves has been an increase across the board.
The Federal Reserve remained on hold, keeping the federal funds target range between 3.50%–3.75%. The vote was nearly unanimous (11–1) as the committee battles still-elevated inflation with a softer labor market. Given recent developments, the committee will continue to monitor and assess incoming data and the evolving outlook. According to Chair Powell, “The implications of events in the Middle East for the U.S. economy are uncertain. In the near term, higher energy prices will push up overall inflation, but it is too soon to know the scope and duration of the potential effects on the economy”.
The Bank of Canada also held rates steady at 2.25%, highlighting similar concerns with the war and its impact on inflation and the global economy. Domestically, after GDP expanded by 2.4% in Q3, the Canadian economy contracted 0.6% in Q4. Governor Tiff Macklem commented that continued trade and geopolitical uncertainty would weigh on the Canadian economy, although the true impact of the war would take time to assess.
Across the Atlantic, the ECB held rates at 2.0%. Eurozone inflation is hovering around the target, longer-term inflation expectations are well anchored, and the economy has shown resilience over recent quarters. In its first unanimous decision in 4 years, the Bank of England held as well, keeping its interest rate at 3.75%. According to the chief U.K. economist at Deutsche Bank, Sanjay Raja, “rate hikes are now a real risk for the economy.”
This is getting a bit repetitive, but the BOJ also held at 0.75%. Governor Ueda highlighted the need for a cautious approach, especially in light of the ongoing Middle East conflict and rising energy prices.
Policy rates have come down from 2023 peaks, with most forecasts suggesting a more cautious approach moving forward. In Canada, since the cycle peaked in July 2023, the Bank of Canada has implemented 9 cuts, with many analysts believing the bank is done with the current easing cycle. As we can see, the overnight rate is well below the historical average. In the U.S., the Federal Reserve has lowered rates by 175 basis points from the peak. The FOMC’s “Summary of Economic Projections”, or dot plot, shows expectations for one more cut this year and one in 2027. However, given that the latest US CPI showed inflation increasing to 3.3% in March, from 2.3% the month before, the rate path is highly uncertain.
Now, if you’re running a small or mid-sized business, how does this affect you? Although conditions for borrowing have improved, they remain restrictive. Rates appear to be bottoming out at a higher “neutral” level than we experienced post-COVID. Borrowers with strong balance sheets should continue to find access to capital, whether traditional bank financing or Private Credit, while lower-quality borrowers may find it difficult. As the great Warren Buffett has said, “Only when the tide goes out do you discover who’s been swimming naked.”
As we keep an eye on interest rates and borrowing costs, there are several factors we should continue to monitor:
Long-term borrowing costs continue to rise, even as the Fed remains on hold. This is important because mortgages, corporate debt, and other long-duration assets are more tied to the long end of the curve than to overnight policy rates. Thus, central bank easing alone is not enough to lower borrowing costs.
Although inflation expectations were moderating, the Iran war has caused a sharp rebound over the past few weeks. This has led to greater uncertainty, as attacks on critical energy infrastructure could have long-lasting effects, even if an end to hostilities is negotiated.
We have seen inflation drop from its 2022 peak. However, it has remained stubbornly above target for close to 5 years, and recent global events have decreased the probability of a return to target anytime soon.
For business owners who were waiting for rates to come down, the time is here. With most central banks on hold, the focus should be on finding the right financing partner who will provide a customized and flexible solution to fit your needs. As we all adjust to the new normal, which is actually not new at all, historically speaking, it is important to remember the wise words of Howard Marks: “Interest rates are not high, only higher than the recent past”.
Thank you for joining us on another episode of Bond Capital TV. Whether you’re an operator, investor, or advisor, staying informed is your best defense in uncertain times.
We hope you found today’s insights valuable. I’m Leslie Clark for Bond Capital, and we look forward to seeing you next time.
