Forget Overkill. Central Banks Are Still Way Behind.
The extraordinary thing about rates is not how high they are but how low. They will have to increase much more to get inflation sustainably lower.
The cost of money is going up.
Photographer: Ian Waldie/Getty Images
Expectations of how much central banks will push interest rates higher to get inflation under control have increased to such an extent that some are starting to talk about overkill. Markets now think that benchmark rates in the US will top out at about 4.7% (from 3.25% now), 3% in the euro zone (from 1.25%), and 5.8% in the UK (from 2.25%). Partly as a result -- though also because energy prices have fallen -- expectations for inflation over the next five years has tumbled.
That combination is why expected real rates — yields on conventional bonds minus the expected inflation — have spiked higher. Perhaps unsurprisingly, the UK has led the pack, and over the past year expected five-year real yields have risen an extraordinary five percentage points. But the surge in expected US real yields has not been far behind. This vertiginous rise has clobbered financial assets and led to all the muttering about overkill. The extraordinary thing about rates, though, is not how high they are but how low. They will have to increase much more to get inflation sustainably lower.