The Global Dimension of the Central Banking Effort to Reduce Inflation
March 28, 2023
A wide spectrum of central banks’ policy interest rates have been raised substantially. The effort began in 2018 in Sweden, in 1921 for monetary authorities in the U.K., South Africa, New Zealand, Pakistan, Poland,Hungary, the Czech Republic, Norway, Denmark, Iceland, South Korea, Sri Lanka, Chile, Mexico, Brazil, Argentina, Peru, Colombia, and Ukraine. In 2022, the bandwagon of credit tighteners was joined by the Federal Reserve, Bank of Israel, European Central Bank, Swiss National Bank, Bank of Canada, Reserve Bank of Australia, Reserve Bank of India, Bank Indonesia, Central Bank of the Philippines, Bank of Thailand, National Bank of Malaysia, and Central Bank of Argentina.
From pandemic low-points, central bank interest rates have been raised the most in Argentina (40 percentage points to 78%), Ukraine (19 percentage points to 25%), Pakistan (13 percentage points to 20%), Hungary (12.4 percentage points to 13%), Brazil (11.75 percentage points to 13.75%),Colombia (11 percentage points to 12.75%), and Sri Lanka (10 percentage points to 14.5%). There are 100 basis points (bps) to a percentage points, and other cumulative rate hikes have totaled 700 bps in Iceland, 665 bps in Poland, 675 bps in the Czech Republic, 675 bps in Mexico, 750 bps in Peru, 475 bps in the United States, 415 bps in Israel and the U.K., 450 bps in Brazil, 500 bps in Norway, 425 bps in Canada and the Philippines, 375 bps in South Africa, 575 bps in Romania, 350 bps in Euroland, Sweden and Australia, 320 bps in Denmark, 300 bps in South Korea, 200 bps in Indonesia, 250 bps in India, and 100 bps in Thailand and Malaysia.
Rapid monetary tightening has been matched by elevated inflation that was mistakenly thought likely at first to prove shortlived. Inflation remains far above the 2% soft spot of price stability and, even in the face of aggressive policy counter-measures, has reversed course much more gradually than the previous pace of acceleration. Comparing latest year-on-year consumer price inflation reading to those two years earlier and one year earlier, the progression has traced the following patterns: rising in the U.S. from 1.7% to 7.9% and then retreating only to 6.0%; Rising in the euro area from 0.9% to 5.9% in year one and further to 8.5% in year two; accelerating in the U.K. from 0.4% to 6.2% and further to 10.4%; climbing in Canada from 1.1% to 5.9% and then edging back to 5.2%; climbing from 0% to 3.5% in Israel and than to 5.2% there; swing from a 0.5% deflation two years ago in Switzerland to 2.2% inflation a year ago and rising further over the past year to 3.4% now; accelerating in South Africa from 2.9% to 5.7% and now 7.0%; soaring in Pakistan from 142% to 163% and now 211%; jumping from 3.2% in Romania to 8.5% and then 15.5% and in Poland from 2.4% to 8.6% and now 18.4%; rising from 1.4% in New Zealand to 5.9% and now 7.2%; doubling in Iceland from 4.3% two years ago to 6.7% and then 9.8%; catapulting in Sri Lanka from 3.3% to 15.1% and now 50.6%; increasing in Chile from 2.8% to 9.4% and then 11.9%; doubling in Brazil from 3.8% to 7.3% and then 7.6%; and increasing from an already runaway 40.7% two years ago in Argentina to 55.1% a year ago and 102.5% now.
One country conspicuously missing so far from this documentation of the monetary response to excessive inflation is Japan because its short-term policy interest rate has stayed unchanged at -0.10% throughout an acceleration of Japanese inflation from -0.4% two years ago to +0.9% a year ago and 3.3% now. The revival of Japanese inflation has been no steeper than in economies where a forceful cycle of interest rate hikes took place. Japan has also imposed a cap on long-term interest rates, capping the 10-year JGB yield at 0.50%, and the Bank of Japan’s short-term interest rate hasn’t surpassed 0.50% since 1995.
Two other strange cases involve Russia and Turkey. In the early days after Russia invaded Ukraine 13 months ago and western nations imposed economic sanctions against Russia, the Bank of Russia’s policy interest rate was lifted very sharply to 20.0%, the central bank was subsequently lowered in several large increments to 7.5%, which is even below the level at the start of last year. Russian CPI inflation of 11.0% exceeds the central bank rate level by 3.5 percentage points, but the doubling from 5.7% is not more pronounced than in many other economies around the world including Ukraine. Ukraine’s central bank rate was 6% two years ago when inflation stood at 7.5% and is at 25% now, which is matched by a 24.9% rate of inflation. One lesson from Russia’s experience is that economic sanctions – so often employed as a bloodless response to reprehensible military aggression – has once again proven ineffective and a huge waste of time.
Turkey has one of the world’s highest inflation rates. Such accelerated from 15.6% two years ago to 54.4% one year later and, at 55.2% hasn’t shifted on net over the past 12 months. An initial tightening lifted Turkey’s central bank rate to 19% where it stood from March to September of 2021. But political pressure on the central bank to lower the rate has reduced such to 8.5% currently.
Copyright 2023, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
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