According to the World Bank, the July announcements by central banks of interest rate increases was the most significant since the 1970s.
Photo by Samuel Corum/Bloomberg News
The world’s central banks are increasing their key interest rates in what is the largest tightening of monetary policies ever recorded. Economists worry that they might go too far if it doesn’t take into consideration their collective impact on global consumption.
According to the World Bank the number of rate hikes announced by central banks around world was the highest since records began in 1970. Wednesday’s meeting saw the Federal Reserve announce its third 0.75 percentage point increase. The rates were also increased by counterparts in Indonesia and Norway, South Africa, South Africa, Sweden Switzerland, Taiwan, Taiwan, and the U.K.
These rate rises are also larger than usual. The reference rate at Sweden’s Riksbank was increased by a full percentage-point on Sept. 20. Since July 2002, when it adopted its current framework, the bank hadn’t previously raised rates or decreased them by more than half a percentage point.
These central banks almost always respond to high inflation. According to the Organization for Economic Cooperation and Development, July’s inflation rate across the Group of 20 major economies was 9.2%. This is twice the rate a year ago. Higher rates can cool the demand for goods, and reassure households as well as businesses that inflation will fall over the next year.
Some worry that central banks are not effectively responding to the global problem of high prices and excess demand. They fear that central banks will go too far and cause a global downturn that is deeper then necessary.
“The current danger…isn’t so much that current and planned actions will fail eventually to quell inflation.”
Maurice Obstfeld,
The former chief economist at International Monetary Fund wrote this note earlier in the month for the Peterson Institute for International Economics. He is a senior fellow there. It is because they collectively go too far, and drive the world’s economy into an unnecessarily severe contraction.
There are no signs that central banks will pause to assess the impact of rate increases so far. Wednesday’s Fed meeting indicated that it would likely raise rates by 1 percentage point to 1.25 percent over the next two meetings. JPMorgan economists expect central bankers from Canada and Mexico, Chile, Peru, Australia, New Zealand. South Korea, India. Malaysia, Thailand, South Korea, Peru, Hungary, Israel, Poland. Romania, Australia, New Zealand.
This is a rare combination of central-bank firepower and precedents. But are they all required to do so much if they’re all doing the same thing.
Most economists agree that inflation in any country is not solely due to internal forces. The prices of easily traded goods or services are also affected by global demand. This is a long-standing observation for commodities like oil. In 2008, a boom in China drove up the prices even though the U.S. was in recession. This has been true for manufactured goods in recent years, whose prices were boosted by disruptions in supply chains (such as at Asian ports) and increased demand from government stimulus. One Fed study showed that U.S. fiscal stimulus increased inflation in Canada and the U.K.
Governor of Sweden’s Riksbank is the bank. Stefan Ingves raised its reference rate by a full point this week.
Photo by Mikael Joberg/Bloomberg News
However, if a central bank focuses on matching supply and demande at a national level, it could go too far. Other central banks are already weakening global demand, which is one of the main drivers of national inflation. The global excess tightening may be significant if each central bank does this.
The World Bank shares Mr. Obstfeld’s concerns, warning in a report: “The cumulative effects of international spillovers of the highly synchronous tightening monetary and fiscal policy could cause more damage growth than would be expected from an easy summation of the policies of individual countries.”
This risk could be reduced by coordination between central banks, for example when they cut key interest rates during the global financial crisis. Similar to 1985, when advanced economies worked together to bring down dollar, and again in 1987 when they worked together to support it.
Fed Chairman
Jerome Powell
Wednesday’s remarks made by the president of the International Central Bank Association (ICRA) were a reminder that central banks have coordinated interest rate actions in the past. However, it was not appropriate now because “we are in very different circumstances.” He also stated that contact between global central banks is more than ongoing. “And it’s not coordination, but there is a lot of information-sharing,” he said.
If coordination is not possible, a better goal might be for national policy makers, as advised by the World Bank, to “take into consideration the potential spillovers from globally synchronized domestic policies.”
Jerome Powell, Fed Chairman, stated that it was not appropriate for central banks at the moment to coordinate interest rate actions.
Photo: Drew Angerer/Getty Images
Powell suggested that this already happens. He stated that the Fed forecasts always consider “policy decisions-monetary policy and other [and] economic developments that are occurring in major economies that could have an impact on the U.S. Economy.”
Many central banks are concerned about raising rates too much in the face stiff inflation. “In this environment central banks must act forcefully,” said
Isabel Schnabel
In a speech in late August, a European Central Bank policy maker spoke. “Regaining trust and maintaining trust requires that we bring inflation back to target quickly.”
“Informal coordination would prove beneficial,” he said.
Philipp Heimberger
An economist at the Vienna Institute for International Economic Studies. “Systematic thinking about the impact of interest rate hikes would have to consider what other central banks are doing simultaneously. This would be a huge game changer.
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Mr. Heimberger stated that the Fed plays a key role in the rise of global interest rates. He also said that the Fed should “seriously think about the implications of its interest rate hiking cycle for other parts”
Gilles Moec,
chief economist at insurer
AXA SA
It is doubtful that effective coordination can be achieved and the argument is that central banks should tread carefully as they consider further rate increases.
Mr. Moec stated that “Once monetary policies are in restrictive territory, it becomes dangerous to raise mechanically at every policy gathering without taking the time and assessing how the economy is responding.” “The risk of overreaction increases if there is not enough information between two meetings.”
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