New tightening cycle beginning?

The chart shows different measures of Central Bank discount rates (= cash rates/bank rates/Fed Funds rate).

The green line is the GDP-weighted average.  It would be biased towards countries with a high percentage of world GDP, such as the US, Europe, Japan, the UK, etc.  It covers countries which make up 83% of world GDP.

The blue line shows the median discount rate for all the countries I monitor.  The median is the midpoint of a range of data points.  So, currently, the median D/R is 4.30%.  Half the countries of the world have a lower rate than 4.3, and half a higher one. 

The red line shows the unweighted average.  Because so many developing countries have high inflation and therefore a high bank rate, this average is skewed towards these countries.  But it does reflect the actual bank rate the different countries of the world face.   

All measures have started rising.  Long-dated bond yields are also rising (see lower chart).

This means that credit is starting to dry up, which is typically not good for the world's share markets.  The initial impact of credit tightening tends to be felt in financial markets.  Later on, it spreads to the real economy.

So far, the tightening has been modest.  But if inflation remains stubbornly higher than CBs want, and the oil market remains tight, then the probability is that economic growth will, after the usual lag (~12 months) start to falter.

Meanwhile, the favourable winds driving the start market higher, are turning to headwinds.  And credit costs for the debt inflating the AI bubble are soaring.  And spending on AI has been driving economic growth in the US, and therefore also the world economy.  If (when!) credit for AI dries up, there will be a credit crunch and economic slump comparable to the 2008/2009 GFC.

There is a lot of risk out there.  Take care.