Economic resilience and policy responses: A guide for liquidity investors

Explore how major central banks' policy adjustments are impacting liquidity investment strategies. Learn about the anticipated rate cuts, strong credit fundamentals, and how to adapt investment strategies in the current economic environment.

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Top Five Questions EMEA Liquidity Investors Are Asking Now

The ECB and BoE are cautiously approaching rate cuts, with decisions being heavily data-dependent. The ECB is expected to continue cutting rates at alternate meetings into 2025, while the UK base rate may remain unchanged in the near term. Both central banks are balancing the need to support economic growth with the risk of resurgent inflation.

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Top Five Questions APAC Liquidity Investors Are Asking Now

Moderating inflation has allowed central banks to shift their focus towards fostering economic growth, signaling an impending monetary policy pivot. While markets have quickly priced in multiple rate cuts, the pace and magnitude of central bank actions remain uncertain. For APAC cash investors, the implications of the Federal Reserve (Fed) policy continues to be significant; but local inflation, economic conditions, and political nuances will also influence regional cash investment strategies.

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BoE cuts rates: Balancing like an Olympic gymnast

The Monetary Policy Committee (MPC) voted by a narrow majority of 5-4 to reduce the Bank Rate by 25 basis points to 5%. This is the first cut since March 2020. Governor Andrew Bailey stressed a cautious approach and said the Bank of England (BoE) is alert to risks of another surge in inflation.

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PBoC: If fiscal won't, monetary will.

On 22 July, the People’s Bank of China cut its 7-day Reverse Repo rate and Loan Prime Rate by 10 basis points. The decision shows the central bank is shifting its focus to the 7-day Open Market Operation rate as its new policy benchmark.

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Positioning for a falling interest rate environment

Predicting and timing a rate-cutting cycle is challenging. Focusing on what they can control can help cash investors to capture current yields while strategically positioning for future rate declines.

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ECB: A cut for credibility

At its monetary policy meeting on the 6 June, the European Central Bank (ECB) cut its key interest rates by 25 basis points (bps). The rate cut was broadly signalled by the central bank and widely expected by investors.

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Hong Kong and Singapore: Awash with liquidity

Singapore and HK interest rates have moved sharply higher over the past few years, abetted by a high correlation with US monetary policy. However, they have echoed rather than mirrored the upward trend in US interest rates.

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APAC central banks: Grappling with divergence

Falling inflation across APAC has raised expectations of rapid central bank rate cuts to boost flagging domestic growth – however APAC central banks appear reluctant to diverge from the Fed.

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Stepping out to Standard Money Market Funds as Interest Rates Fall

We believe that interest rates in developed markets have peaked, with central banks likely to initiate gradual cuts rather than returning to the near-zero levels seen in recent years. The anticipation of declining interest rates, alongside a resilient macroeconomic outlook and favourable all-in yields, could present one of the best environments for standard money market strategies in the last 15 years, in our opinion.

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Potential impact of Federal Reserve rate cuts on Asia-Pacific markets

With US inflation finally trending downwards, the Federal Reserve (Fed) has pivoted to a more dovish bias, although the timing and extent of future rate cuts remains uncertain. Across the Asia-Pacific (APAC) region, inflation is also declining, raising the prospect of lower regional interest rates. However, the impact will likely be more variable due to country-specific nuances.

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Top Five Questions Liquidity Investors Are Asking Now

With Q1 '24 underway, Kyongsoo Noh answers the top five questions on the minds of liquidity investors.

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Reserve Bank of Australia: New style same focus

At its first monetary policy meeting of 2024, the RBA left its OCR unchanged at 4.35%. The decision was in-line with market expectations, although the tone of the accompanying statement was more hawkish than expected.

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Bank of England: Focus shifts to cuts as bias of further hikes removed

The BoE held the Bank Rate steady at 5.25% for the fourth consecutive meeting but removed their bias towards the next move being another hike in rates. Notably, the decision was not unanimous as two members continued to vote for a 25 basis point (bp) hike, while one member voted for a 25bp cut leaving six members, including the Governor voting for unchanged rates.

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MAS remains hawkish as it meets more frequently

On 29th January, the Monetary Authority of Singapore (MAS) decided to maintain the prevailing rate of appreciation of the S$NEER policy band, with no change to its width nor centre point.

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Lagarde and the Governing Council won’t be forced into acting prematurely

At its first monetary policy meeting of the year on 25 January 2024, the European Central Bank (ECB) kept all key interest rates on hold. This was the third consecutive meeting to conclude with no change to monetary policy, with the last rate hike occurring in September 2023.

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BOE holds rates and persists with higher for longer message

BOE voted to maintain Bank rate at 5.25% (6:3 split for hike) again. The Panel maintained its guidance that rates would need to be “sufficiently restrictive for sufficiently long” to curb inflation.

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Lagarde and the Governing Council keep up their guard

At its monetary policy meeting on 14th December 2023, the European Central Bank (ECB) kept all key interest rates on hold, for a second consecutive meeting. The ECB announced that reinvestments of the Pandemic Emergency Purchase Program (PEPP), will decrease by 50% from July 2024. President Lagarde stated that the Governing Council (GC), will not let its guard down, in the fight against inflation.

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A pivot toward the other side of the mandate? FOMC Statement: December 2023

The Federal Open Market Committee (FOMC) left the federal funds target range unchanged at 5.25-5.50%, as anticipated. However, the quarterly update for the Summary of Economic Projections (SEP) suggested a dovish bias, with the “dots” pointing towards three cuts for next year, with a rate at the end of 2024 of 4.50-4.75%. The market reacted by increasing expectations for rate cuts in 2024, pricing in cuts more aggressively than the Fed.

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Looking beyond yield when considering cash

When comparing short-term money market strategies with step out strategies such as standard money market or ultra-short duration bond strategies, it’s important to consider the future total return potential rather than just today’s yield.

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Reserve Bank of Australia: A third pause for reflection

At their last monetary policy meeting of the year on 5 December, the Reserve Bank of Australia (RBA) left the Overnight Cash Rate (OCR) unchanged at 4.35%. This was in line with market expectations.

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ECB and Minimum Reserve Requirements

Market attention has veered towards other policy options that are at the disposal of the ECB’s Governing Council (GC). One such option, the remuneration of Minimum Reserve Requirements (MRR), has recently come under particular focus. While not widely understood, adjustments to this rate could have significant implications for short term interest rates and liquidity demand.

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RBA: one more (and done?)

At its monetary policy meeting on the 7 November, the Reserve Bank of Australia (RBA) decided to raise the Overnight Cash Rate (OCR) by 25bps to a 12-year high of 4.35%. The rate hike, which follows a five-month hiatus was widely anticipated by economists following stronger than expected economic data.

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Bank of England keeps rates unchanged but doesn’t want to appear dovish

At its November Monetary Policy Committee meeting, the BoE voted to maintain the Bank Rate at 5.25%. The BoE’s Governor Andrew Bailey noted that inflation has fallen, and is expected to fall further this year and next year, while monetary policy is viewed as restrictive.

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Is the ECB out after a count of 10?

At its monetary policy meeting on 26 October 2023, the European Central Bank (ECB) kept all key interest rates on hold, the first pause after 10 consecutive rate rises.

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Monetary Authority of Singapore: Policy sufficiently tight to pause

At its semi-annual monetary policy meeting on 13 October, the MAS decided to maintain its prevailing monetary policy stance Fig 1a for a second meeting - following five previous upward adjustments. The decision was In-line with expectations, with the central bank leaving the slope, band width, and mid-point of SGD NEER unchanged.

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RBA: New Governor, similar policy stance

At Michele Bullock’s first monetary policy meeting as the Governor, the Reserve Bank of Australia (RBA) decided to leave the Overnight Cash Rate unchanged at 4.10%. This was the fourth pause in the central bank’s rate hiking cycle.

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Time to step out

The rise in interest rates over the last two years has been dramatic. UK interest rates have risen at the sharpest pace since the 1980s, while rates in Europe have rapidly increased from negative territory to the highest level since the inception of the euro. Evidently, this sharp rise in rates is good news for corporate treasurers.

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