29 July 2023
Has the global central bank tightening cycle peaked? After inflation surged in 2022, over 80% of global central banks entered an interest rate hike cycle, a number not previously reached since 1990.
The chart below shows the percentage of global central banks that have increased their policy rates since 1990 to the present.
Historically, prolonged periods of rising policy rates have slowed down future economic growth as consumer spending and asset prices are challenged by higher interest costs.
Source: Bank of International Settlements, Mergence
We use our composite Mergence Global Growth Cycle as our primary indicator of global growth, and the chart below shows the historical relationship between the percentage of central banks raising rates and the change in global growth over the next year, showing that historically coordinated policy tightening has on average led to declining growth over the next year.
Source: Bank of International Settlements, Mergence
Our Mergence Global Growth Cycle entered a falling growth phase in August 2021 that has now lasted for 21 months. Typically, these phases have lasted between 9 and 24 months, but as the analysis above shows, we would be looking for global policymakers to slow down rate hikes and start to shift towards rate cuts to give us confidence in calling the bottom of the current growth cycle and seeing a return to rising global growth and therefore a more supportive backdrop for risk assets.
Our Market Snippets email aims to provide concise insight into our investment research process. Each week, we highlight one chart that showcases our research, motivates our current positioning, or simply presents something interesting we’ve discovered in global financial markets.
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