Trends in Central Banks' Policy Rates

Investing can be one of the easiest tasks for some people whereas it is a huge deal for the majority of the people who spend half of their lives to earn some money by monetizing their time and energy to generate a store of value that we call money today.

The most critical point in investing might be surfing the trend at the right time. Though it may require some financial literacy, an elementary level of financial education can enable someone to be aware of the world's macro trends and take positions accordingly. The simplicity of investing arises from the fact that buying something at a lower price and selling it higher brings you more money (regardless of the time, inflation, value of the currency etc.)

To be aware of the macro perspective, it may be quite handy to see what the central banks are buying as a narrative. There are hardly any divergences among the top central banks, as most of the developed economies do not face fundamental monetary concerns like the emerging markets, and they can easily follow the policies of the FED as a leading figure.

BIS Data for Policy Rates between 2000 - 2025

You will notice the trends that 4 major central banks follow. We can add Central banks of Canada, Switzerland, Sweden, England, and many others but the trend is likely to be close to the ones on the chart. The divergences may be available for the Bank of Japan and the Bank of China as they are chasing different monetary policies.

As we dive deep into the chart, we realize the low policy rates era between 2009 and 2015, following the slight spikes from 2016 to 2020 pandemic times. After the banking crisis in 2008, the rates were pretty low to support the economic activities and the markets but there were no major bull runs due to the lack of inflation that can trigger a boom in the profits.

We are again in an era that has been followed by quantitative tightening (low liquidity and money-burning activities by the central banks) and the consolidation of the interest rates as the inflation settles down.

What the chart suggests to me is that the downtrend in the policy rates is likely to lead the continuum of the bull market in the technology stocks and cryptocurrencies. Having a 3% policy rate by the FED and around a 2.5% policy rate by the ECB can be a good ground to boost the risk appetite in the world. As the go-to place for carry trade operations, the rates by the Bank of Japan have to be around the current levels.

I firmly believe that the ideal scenario is more likely to come true unless a black swan like Covid hits the economy. The risks are always available but we need to set our game plans according to what the data refers to.

What do you think about the macro trends in the CB policy rates?

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Posted Using INLEO