Raymond Sia
- Three Influential Central Banks
The world, especially the equity and capital markets, are closely watching the actions of the US Federal Reserve (Fed), Bank of England (BOE), and European Central Bank (ECB) regarding interest rates. Who will cut first?
Based on economic data and recent narratives, it appears the order will be ECB, BOE, and Fed. The ECB’s rate cut could come as soon as June 2024, while the Fed’s pivot is likely in the fourth quarter of 2024, with futures pointing to September 2024, barring any unforeseen surprises in economic data. These central banks’ actions (or inactions) will undoubtedly impact global markets.
- 3% Inflation Target
The Fed, BOE, and ECB’s fixation on the 2% inflation target may not be easily achieved in this “new world order” of geopolitical tension, supply chain disruptions, weather disruptions, and sticky inflation. Many economists expect the “R-star” or neutral rate of interest, where the economy is at full employment and stable inflation, to be rising and higher than it was in the past decade. With this in mind, a 3% (or even 2.5%) inflation target appears more reasonable for the reasons stated.
Keeping the utopian target of 2% will certainly keep interest rates “higher for longer” and will not augur well for many other markets, economies, and currencies.
- Three Months of Consistent and “Confident” Data
This is what is needed to provide confidence to these three central banks before a pivot occurs. Three consistent and compelling months of data showing inflation is abating will provide the confidence for the first interest rate cut to happen. However, one needs to be mindful that “one (or three) swallow(s) doesn’t make a summer.”
Impact on Cambodia
Being a dollarized economy, Cambodia’s interest rate direction is heavily influenced by the Fed. Post-COVID-19 and post-Fed’s hiking interest rates over the past two years, Cambodia’s banking sector has been facing more downward pressure on profitability (resulting from higher cost of deposits and funding) and upward pressure on non-performing loans (NPL), which directly impacts banks’ profitability. In 2023, about one-third of commercial banks incurred a loss mainly due to the headwinds stated earlier.
As long as US interest rates remain elevated, banks will continue to face these challenges. On the flip side, savers and depositors are benefiting from higher deposit rates as banks compete for deposits. It appears to be a good time for depositors to lock in longer tenors, considering US interest rates are expected to be on a downtrend in the next 12-24 months.
Raymond Sia currently serves as the CEO of Canadia Bank and is an experienced speaker & columnist on Banking, Currencies & Foreign Exchange and Leadership
