Central bank interest rate hikes are far from over

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(Bloomberg) – This week’s wave of interest rate hikes is unlikely to mark the end of a campaign by central banks to crush inflation, even as they run the growing risk of plunging their economies into recession.

From Ulaanbaatar to Washington, many policymakers raised their benchmark borrowing costs during a three-day window, making it clear that their main concern was the highest inflation since the 1980s.

This marks a dramatic change from a year ago, when officials publicly predicted that the pandemic-era price spike would soon fade.

Among major players, Sweden’s Riksbank surprised with a 100 basis point hike, while the Federal Reserve raised its benchmark by 75 basis points for the third consecutive meeting. Indonesia was also more aggressive than expected and Vietnam made a rare move, while Switzerland ended the European experiment with sub-zero rates.

Yet Turkey cut rates, Brazil and Norway signaled they may end their monetary policy tightening, and the Bank of Japan stood out among developed economies by keeping rates ultra-low. The Japanese also intervened in the markets to try to stem the fall of the yen.

“Central bank tightening is far from over,” said Chua Hak Bin, an economist at Maybank Investment Banking Group in Singapore. “Inflation likely peaked with falling commodity prices, but wage cost pressures have not abated, which could mean more persistent and sticky core and services inflation.”

However, the higher rates rise, the greater the risk of slowing economic growth.

“Just as central banks misread the factors driving inflation in 2021, they may now be underestimating how quickly inflation could decline as their economies slow,” Maurice Obstfeld said. , senior fellow at the Peterson Institute for International Economics and former chief. economist at the International Monetary Fund.

Here’s a look at the week’s decisions and what could come next:

WE

After cutting its key rate to a range of 3% to 3.25%, Fed officials sent a more hawkish signal than expected by forecasting an additional 1.25 percentage point tightening before the end of the year. .

This prompted Goldman Sachs Group Inc., Bank of America Corp. and others on Wall Street to raise their own forecasts to show another 75-point jump in November and a higher peak in 2023.

Speaking of a possible pain in the economy, Chairman Jerome Powell indicated that officials are increasingly willing to tolerate a recession as the price of controlling inflation. According to Bloomberg Economics, raising rates to 4.5% would cost about 1.7 million jobs, and 5% would mean 2 million fewer jobs.

UK

The Bank of England made a second straight half-point hike in its battle to bring down inflation.

Three officials have pushed for the institution to join its global peers in advancing at an even faster pace.

Swiss

The Swiss National Bank raised interest rates by 75 basis points, bringing borrowing costs above zero for the first time in nearly eight years.

Some had expected an even bigger hike, but Chairman Thomas Jordan said “it cannot be ruled out that further increases in the SNB’s policy rate will be needed to ensure price stability over the medium term.”

Sweden

After taking economists by surprise, Sweden’s Riksbank said it would continue to raise borrowing costs to stem price increases and maintain confidence in its ability to bring inflation back to target.

The bank’s forecast points to a half-point increase in November, followed by a hike in early 2023, taking the key rate to a peak of 2.5%. Some think the officials will have to be tougher in November and beyond.

Norway

The central bank raised its key interest rate by half a point, but signaled that its tightening may be coming to an end as officials watch the economy react to their action against inflation. The key rate of 2.25% is now at its highest since 2011.

Brazil

Brazil’s central bank maintained its benchmark at 13.75% after 12 consecutive increases.

Two officials wanted to tighten again and board members wrote that they would remain vigilant on inflation and assess keeping rates stable for a “long enough period” to bring prices back to target.

Mongolia

Mongolia’s central bank raised interest rates to the highest in five years in an attempt to control the fastest inflation since 2017 and halt currency outflows. Inflation is expected to moderate after the change, Governor Lkhagvasuren Byadran said.

Philippines

The central bank of the Philippines raised its key rate for the fifth time this year to ease inflationary pressures amid a collapsing currency and a hawkish Fed. Bangko Sentral ng Pilipinas raised the overnight repo rate by 50 basis points to 4.25%. The BSP “will do what is necessary” to achieve an inflation path in line with the target, Governor Felipe Medalla said in a recorded speech.

Taiwan

Taiwan’s central bank raised its benchmark by a modest amount, the third rise this year, as it tries to tackle inflation without further weighing on its slowing economy. It lowered its economic growth forecast for 2022 for the third time this year.

Indonesia

The central bank launched its bigger-than-expected hike to stem inflation and stabilize the rupee, marking an aggressive turn for policymakers who were monetary policy outliers until last month. Its seven-day reverse repurchase rate was increased by 50 basis points, the biggest increase since 2018, to 4.25%. Governor Perry Warjiyo said the bank would take steps to bring consumer prices back within its target of 2% to 4% by the second half of 2023.

Vietnam

In a rare tightening move, its central bank will raise two of its key rates by one percentage point each from Friday after the local currency fell to a record low. The move came hours after Prime Minister Pham Minh Chinh asked the central bank to consider raising interest rates to support the dong.

Japan

The Bank of Japan kept rates ultra-low and Governor Haruhiko Kuroda said there was little prospect of a rate hike in the near term. To add to the drama, the authorities intervened in the markets to support the yen for the first time since 1998 after its recent fall against the dollar.

Turkey

Turkey’s central bank has cut rates sharply again, despite inflation at its highest level in 24 years and the pound trading at a record high.

The monetary policy committee headed by Governor Sahap Kavcioglu cut the benchmark to 12% from 13% on Thursday. In a statement accompanying its decision, the central bank said there was a “loss of momentum in economic activity”.

Egypt

The central bank surprisingly left interest rates unchanged for another meeting, delaying the global trend as investors await further weakening of the pound and a crucial agreement with the International Monetary Fund. The Monetary Policy Committee maintained the deposit rate at 11.25%.

South Africa

The Reserve Bank raised its benchmark by three-quarters of a percentage point for a second straight meeting, completely undoing its extraordinary pandemic-era stimulus, and stressed it remained ready to act at all costs. urgency to curb inflation.

(Adds South Africa and Egypt)

©2022 Bloomberg LP

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