Volatility and Inflation: Rising Interest Rates or Inflation Under Control?

Volatility and Inflation: Understanding the Impact on Financial Markets and SMEs

Inflation Defeated or a Pause in Interest Rate Hikes to Avoid a Recession?

Is inflation truly under control, or are central banks merely pausing interest rate hikes to prevent a recession? In a context where volatility and inflation Is inflation truly under control, or are central banks merely pausing interest rate hikes to prevent a recession? In a context where

Rapid Increases in Interest Rates, Inflation, and Public Debt

The IMF, in its recent meeting, expressed concerns about inflation and the level of debt accumulated by governments, along with the rising cost of servicing this debt in a high-interest rate environment. The U.S. 10-year Treasury yield is at its highest level since 2008. This trend is not isolated—many other governments are experiencing rapidly increasing rates and high debt burdens.

The Impact of Interest Rates on Real Estate

Some major players in China have already had to reschedule interest payments and debt repayments. With mortgage rates rising by several percentage points, how will consumer purchasing power and spending be affected?

Geopolitical Context and International Tensions

Ongoing geopolitical tensions, particularly in Ukraine and the Middle East, add another layer of volatility to the markets, directly impacting global supply chains and exchange rates.

Exchange Rate Forecasts and Volatility

Exchange rates are inherently unpredictable, but in this environment, it is even clearer that basing business decisions on currency predictions is a risky approach. At best, forecasts can serve as a starting point for exchange rate scenarios in D-Risk FX or as a discussion point with our team to help mitigate risks in your international business operations.

The Safe Haven Effect

The upward cycle of central bank interest rate hikes is nearing its end. Higher U.S. interest rates and the U.S. dollar’s safe-haven status have strengthened it against almost all other currencies in the third quarter.

Throughout the last quarter, the foreign exchange market attempted to anticipate the level at which central banks would consider their efforts to curb inflation sufficient.

In fact, EUR/USD declined steadily with minimal fluctuations over the quarter (from 1 EUR = 1.09 USD to 1.057 USD). The British pound followed a similar slow downward trend (from 1 GBP = 1.31 USD to 1.21 USD).

The Canadian dollar (CAD) also followed this path but with more fluctuations (from 1 CAD = 0.76 USD to 0.73 USD), while the Mexican peso (MXN) moved from 1 USD = 16.5 MXN to 18.25 MXN. In Asia, the Japanese yen also depreciated against the USD (from 1 JPY = 0.00725 USD to 0.0066 USD).

The Role of Central Banks

With the exception of the European Central Bank, which raised its benchmark rate to 4.5%, the Bank of England (5.25%), the U.S. Federal Reserve (5.5%), and the Bank of Canada (5.25%) all held their rates steady at their last respective meetings.

Upcoming central bank meetings and the release of key economic data will be closely scrutinized and could quickly alter this status quo.

Recently, following rising consumer prices, the Bank of Japan surprised markets by raising the cap on 10-year bond yields from 0.25% to 0.5%. Mortgage rates have increased, reflecting a shift away from the Bank of Japan’s historically accommodative policy.

Volatility and Inflation: Is Inflation Truly Under Control?

Germany has seen its inflation drop below 6% for the first time since Russia’s invasion of Ukraine. Italy and France remain around 5%. Overall, inflation in Europe has declined from over 10% to nearly 4% over the past 12 months. Inflation in the UK has also fallen, from over 11% to 6.7%, though it remains the highest in Europe and is declining more slowly than in neighboring countries.

Outlook for the United States and Canada

In the U.S., inflation (3.7%) slightly accelerated alongside increased consumer spending at the end of Q3, though core inflation (excluding food and energy) showed a slight decline. The Fed projects a return to its 2% inflation target in the coming months.

In Canada, after rising from 2.8% in June to 4% in August, inflation eased to 3.8% in September. This decline follows the Bank of Canada’s rate-hiking cycle, which is expected to continue its quantitative tightening policy.

However, current levels remain two to three times higher than most central banks’ 2% target, making further rate hikes a possibility.

The Economic Perspective

The U.S. economy remains stronger than expected, while China’s economy is weaker than anticipated. European growth has slowed further. Globally, inflation is declining as supply chain bottlenecks ease and higher interest rates dampen demand, reducing price pressures.

Upcoming Challenges

Central banks will closely monitor inflation persistence. If inflation does not continue to decline, further interest rate hikes may be necessary. So far, the global economy has absorbed previous rate hikes without showing severe signs of slowdown. If this latest round of hikes is sufficient, a “soft landing” scenario becomes plausible. However, if inflation remains sticky and rates rise again, economic resilience will be put to the test in the coming months.

While recent economic data has been positive, the recent outbreak of violence in the Middle East poses downside risks to growth and a strong upside risk to inflation.

For more insights on managing your business in a high-interest-rate environment, check out this article from the Bank of Canada: How higher interest rates affect inflation

International Markets: A World of Opportunities

Growing your business internationally drives growth but also exposes SMEs to risks. Tracking how exchange rates affect performance is no easy task.

D-Risk FX provides SMEs with performance, risk, and scenario analyses by market, currency, and business line—leading to a tailored hedging strategy and real-time visibility on projected financial performance.

Gain autonomy, automate your processes, and approach foreign markets with the confidence of a clear currency risk strategy and the tracking tools to support your ambitions.