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At least a half-dozen central banks raised their key interest rates last week as inflation continues to surge unchecked.
The Bank of Canada (BoC) surprised observers by hiking its overnight rate from 1.5 percent to 2.5, the biggest single bump since 1998 during the Asian financial crisis.
The rate is now at its highest since 2008, just as the Great Recession was taking hold.
Additional increases will be forthcoming, bank officials announced.
Canada’s inflation rate was 7.7 percent in May, the highest since 1983.
Meanwhile, unemployment remained at a record low for the fourth consecutive month as wages grew dramatically, both factors that fuel inflation.
Consumer prices in Canada will rise by an average of 8 percent this year, BoC officials predicted, moderate to 3 percent by the end of next year, and settle at the bank’s 2-percent target rate late in 2024.
Some analysts have speculated that Canada’s full-point increase raises the likelihood that the U.S. Federal Reserve will up U.S. rates by the same, The Wall Street Journal said.
The Reserve Bank of New Zealand lifted its rate by a half-point, the third time in three meetings that bank officials did so. Typically, the bank has boosted its rate by only a quarter-point at a time.
The bank set its rate at 2.5 percent, above what it has set as a “neutral” point at which inflation could be reined back without harming the economy.
As a result, New Zealand is the first developed country to raise its interest rate above neutral, placing a higher priority on slashing inflation than on coddling the country’s jobs market.
Inflation in New Zealand reached 6.9 percent in May.
“The global economic outlook has continued to weaken, broadly as expected,” the rate-setting committee said in a post-meeting statement.
“The weaker outlook reflects a tightening of financial conditions, ongoing global supply disruptions, and rising geopolitical tensions,” it added, pointing to rising prices due to the Ukraine war and related Western sanctions and supply chain clogs created by China’s two-month anti-COVID lockdown this spring.
The Bank of Korea (BoK), South Korea’s central bank, also raised its base rate by a half-point last week, the first time it has ever made a half-point hike.
The bank boosted the rate to 2.25 percent after inflation in June reached 6 percent, its highest mark since 1998.
Also, the won, South Korea’s currency, has lost 9.4 percent against the dollar this year, ranking it as one of emerging markets’ worst-performing currencies.
This was the bank’s sixth rate increase since August. Each of the others had been quarter-point bumps.
Korea’s economy will expand by 2.7 percent this year, the BoK predicted, compared with 4.7 percent last year.
The strong dollar and weaker won make the country’s imports more expensive. Also, South Korea’s economy depends on exports, which are slackening amid growing signs of a global economic slowdown.
Among the other banks to join the rising tide:
- Australia’s central bank boosted its rate yet again by a half-point.
- Chile added three-quarters of a point to its rate after analysts had predicted only a half-point rise.
- The Philippines raised its rate by three-quarters of a point after recently dismissing the need for large rate hikes to moderate inflation.
- The U.S. Federal Reserve will increase its rate when it meets next week, with many analysts expecting a one-point rise after U.S. inflation shot to 9.1 percent last month.
- The European Central Bank also has promised a rate increase this week, its first in eight years, as we reported in “ECB Announces Rate-Hike Plan” (14 Jun 2022).
“Central banks will be minded to look through evidence of slowing growth until they are confident the inflation genie is being forced back into the bottle,” Rabobank analysts wrote in a 13 July note to clients.
“We continue to believe that policy makers are willing to countenance triggering a recession if that is the extent to which they need to shift the demand curve in order to meet this aim,” they added.
TREND FORECAST: New Zealand’s central bank is the first to take the necessary step of lofting interest rates above neutral. The message: a recession in the short term is less damaging to the economy than prolonged inflation that embeds itself in consumers’ expectations and sets off a wage-price spiral.
Other central banks need to take a similar step to accomplish their stated mission of reversing inflation. However, few will have the boldness to do so.
Instead, inflation will chip away at businesses’ and consumers’ buying power until people slow buying enough to crash economies into a recession while central banks modest interest rate rises when compared to inflation remain ineffective.