Comparing the Central Bank Interest Rate Paths of the United States, Brazil, U.K., Iceland,Poland and Czech Republic

May 5, 2022

All six of the central banks in this comparative study had interest rate hikes announced either today or yesterday. In none of the cases was the increase the first one of the current cycles. All these tightening cycles represent responses to accelerating inflation caused in large part by external factors like the pandemic, policy responses to the pandemic, and Russia’s invasion of Ukraine. However, differences can be detected in how much interest rates have been raised.

The Icelandic hike of 100 basis points to 3.75% was the sixth increase since May 2021. In total the Central Bank of Iceland’s policy rate has climbed 300 basis points in the past year, of which 225 bps occurred in the past half year. CPI inflation rose to 7.2% in April from 4.6% in the year-earlier month.

Brazil’s Selic interest rate was also increased 100 basis points and is now at a 5-year high. There have been ten rate increases so far since 2021, lifting such from 2.0% to 12.75%. Of that movement, 350 basis points have been engineered in 2022. Consumer price inflation in Brazil had climbed from 6.1% in March 2021 to 11.3% as of March 2022.

There have now been eight policy interest rate hikes since October 2021 by officials at the National Bank of Poland. Today’s increase of 75 basis points was actually slightly less than expected as the previous move in April had been a hike of 100 basis points. Be that as it may, the rate now stands at 5.25% versus 0.10% just before the tightening cycle began. CPI inflation in Poland reached a 25-year high of 12.3% in April, up from 4.3% a year earlier.

The Czech National Bank’s two week repo rate was raised today by 75 basis points to 5.75%. In May 2021, the rate had been only 0.25%. A rapid series of upward increments reacted to CPI inflation that accelerated from 2.3% in March 2021 to 12.4% a year later.

The Bank of England has thus far implemented four interest rate hikes, none greater than 25 basis points. Today’s increase lifted the rate to 1.0%, highest in 13 years. Not until December 2021 did officials begin this cycle of rate normalization. That first increase of 15 basis points reversed a 15-basis point cut that had been made in March 2020, but the 1.0% rate level now is only 25 basis points above the pre-pandemic level. British CPI inflation accelerated from 0.7% in March 2021 to 7.0% a year later.

The Federal Reserve, which in public at least has ruled out increases for now of greater than 50 basis points, lifted its federal funds rate target range by that amount to 0.75-1.00%. This was only the second increase in the Fed’s sequence, which has a neutral objective of lifting the rate at least to a semblance of neutrality, where monetary policy neither boosts nor brakes the U.S. economy’s rate of growth, and officials have expressed a desire to get this task done in an “expeditious” manner. While the Fed targets the personal consumption expenditure price deflator rather than the consumer price index, a study that compares the Fed’s reaction function to those of other central banks should rightfully standardize the process by using U.S. consumer prices. What we see doing that is a three-fold acceleration from 2.6% in April 2021 to inflation of 8.5% one year later.

It may turn out that the Fed’s speed of tightening proves to be enough, but if that’s the case the Fed will almost certainly have to catch some breaks from favorable developments in inflationary forces that are beyond monetary policy’s scope to control. Clearly, Fed officials are hoping and expressing the belief in the plausibility of restoring price stability without a recession. But compared to other central banks, one can’t really argue that the Fed has been doing whatever it takes to complete their mission.

Copyright 2022, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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