BlackRock Investment Institute

Macro insights

Financing becoming more costly

Financial conditions have tightened across developed markets in recent months – in other words, financing is becoming more costly for firms, households and governments. This is reflected in higher bond yields, a stronger exchange rate and lower equity prices – see the chart. Tighter financial conditions typically slow down economic growth.

What’s behind the tightening? Primarily a shift in tone by central banks that has led markets to expect a faster pace of interest rate hikes.

Limited impact so far

Chart showing US equities, dollar and bonds since the start of January 2021

Sources: BlackRock Investment Institute, with data from Refinitiv Datastream, February 2022. Notes:The chart shows the level of equity total returns, trade-weighted U.S. dollar and bond index. The equity index used in the S&P 500 total return index and the bond index used is the Bloomberg U.S. Aggregate Index. All series are expressed so that a decrease denotes a tightening in financial conditions and is indexed to be 100 on January 1, 2021.

Yet markets have not really changed their view of cumulative rate hikes, at least in the U.S., so the tightening has been contained so far. It is also important to view the tightening through the lens of the post-pandemic restart, rather than as the main determinant of growth like in a typical business cycle. The restart doesn’t require stimulus, so some tightening is unlikely to weigh materially on growth.

We do not expect central banks to actively engineer further tightening by raising rates to restrictive levels – but there is the risk that financial conditions could tighten further if markets misinterpret central banks’ policy intentions.

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Elga Bartsch
Head of Macro Research
Read bio
Nicholas Fawcett
Macro Research

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