Commentary on financial market developments – September 2021
Highlights:
- Rising energy prices
- CZ: CNB raises base interest rate to 1.50%
Commentary:
High inflation and rapidly rising commodity prices are starting to stifle advanced economies. The price of electricity in Europe rose by a whopping +47.5% in September. The price of natural gas is up +34% and the heating season is approaching in the northern hemisphere. Logically, the rise in energy prices is also pushing up the price of oil, which rose by +7.6% in September.
In September, the monitored stock markets in the Western Hemisphere lost heavily, while in the Eastern Hemisphere (excluding Australia) they gained. In US equities, this is the first calendar month this year that ended with a loss. On the opposite end, Russian stocks in particular did well, which is not surprising as oil and gas producers are very strongly represented in the Russian index.
Rising energy prices continue to accelerate inflation. Energy is one of the basic inputs for production, so companies that buy at spot prices will have to make their production more expensive. In addition, of course, the price of oil has a negative impact on the cost of transporting goods, so we can expect a further unwinding of the inflationary spiral.
Central banks will react to this and must start tightening monetary policy. We are living in a time of unprecedentedly low interest rates and quantitative easing, which, if continued, could lead to inflation spiralling out of control. That is why central banks will first abandon quantitative easing regimes and gradually raise interest rates. On the last day of September, the Czech National Bank doubled the base interest rate from 0.75% to 1.50%. This was an unexpectedly large increase in the interest rate and the CNB wants to send a clear signal to the market that it will fight inflation. Its aim is to keep inflation at lower levels because high inflation brings uncertainty into the economy, makes currency hedging for foreign trade more expensive and is much harder to plan for when inflation is high.
Rising interest rates, which sooner or later the US Fed and the European ECB will have to do, will slow down economic growth because it will make external financing more expensive for companies. Projects that were on the brink at low interest rates will no longer be worth pursuing at higher interest rates and will be written off.