Interest Rates in 2011 and Economic Prospects

Published by Filipe R. Costa on Tue, 03/01/2012 - 12:16
interest rate

Now that 2011 is over, it is time to analyse what has happened during the year and try to get some insights for the New Year just started. Understanding monetary policy is key to any investment since any change in interest rates affects the value of our investments. Let’s take a brief look at what happened in terms of monetary policy especially concerning interest rates.

The following table shows the full change in interest rates by 10 major Central Banks covered by Cut The Spread. Let’s take a look at it.

  Country Central Bank Currency Governor Interest Rate 2011 Change
uk flag UK BoE Pound Mervyn King 0.50% -
european union flag EU ECB Euro Mario Draghi 1.00% -
us flag US FOMC US Dollar Ben Bernanke 0.25% -
japan flag Japan BoJ Japanese Yen Masaaki Shirakawa 0.10% -
australia flag Australia RBA Australian Dollar Glenn Stevens 4.25% -50 bps
canada flag Canada BoC Canadian Dollar Mark Carney 1.00% -
swiss flag Switzerland SNB Swiss Franc Philipp Hildebrand 0.00% -25 bps
newzealand-flag New Zealand RBNZ New Zealand Dollar Alan Bollard 2.50% -50 bps
sweden-flag Sweden BoS Swedish Krona Sten Ingves 1.75% +50 bps
norway-flag Norway BoN Norwegian Krone Øystein Olsen 2.25% +25 bps

In Australia, Governor Glenn Stevens was seen pushing the key rate higher but due to the international context, he ended cutting it by 50 basis points. In New Zealand the same happened but the country already had a much lower key rate.

Strange was the case in Switzerland. The Swiss Franc assumed a crucial role as a safe heaven and that was to such an extent that the SNB had to peg the currency to the Euro and cut on interest rates to avoid deflation and growth impacts.

In a very different cycle are the Bank of Sweden and the Bank of Norway. Both ended the year with their key rates higher.

Interest rates are related to the economic cycle. When a central bank sees the economy expanding and forming some inflationary pressures, there is a tendency to increase the key rates to avoid inflation. When the economy is under recession or contraction, central banks cut on rates to boost the economy. We started the year with interest rate hikes or, at least, expectations for near future hikes but ended the year with central banks pushing down their key rates. It clearly shows that near term economic prospects changed during the year and the risks of a world recession increased.

Spread betting traders should have this in consideration for their trading in 2012. Although this is not information that is able to impact a single trade, it is valuable information affecting the whole portfolio for the year. The risks of economic recession will bring volatility to the market and investors will be observant. Spread traders should weight the risks and avoid engaging in too bullish positions. If you have shares in your portfolio, try to build it with long and short positions. Building a portfolio of just long positions and with leverage at the maximum is not wise, especially under the current economic environment.