According to Reuters calculations, more G10 central banks raised interest rates in June than any month in at least two decades, and with inflation at multi-decade highs, the pace of policy tightening should not slow down in the second half of 2022.
Central banks overseeing seven of the 10 most traded currencies raised rates between them by 350 basis points last month, nearly half of the total of 775 basis points administered by policymakers in the group this year to date.
As the US Federal Reserve hiked rates by 75 basis points to a range of 1.5% to 1.75%, its biggest move since 1994, Switzerland surprised markets with a 50 basis point hike. borrowing costs, such as the measures taken by Australia, Sweden, Norway and Canada.
These countries are still far behind the emerging market central banks which mostly initiated rate hike cycles last year. But they move fast.
Already in July, the Reserve Bank of Australia granted a rate hike of 50 basis points. On July 21, the European Central Bank will make its first rate hike since 2011 and the Fed is expected to go ahead with another 75 basis points at its July 26-27 meeting.
“The Fed seems on autopilot to hit 3.5% and the ECB is also on autopilot to get rates to positive levels,” said Alex Brazier, deputy director of the BlackRock Investment Institute.
But US rates at 3.5% “will have the effect of seriously slowing the economy, so after that there will have to be a change of course,” Brazier added.
Squaring the circle between avoiding a hard landing in growth and controlling inflation – now in double digits in many countries – is the most difficult for developing countries.
Emerging economies have, for the most part, quickly gone off the rails in their fight against inflation, raising rates long before their developed counterparts begin to do so.
Many continue to raise borrowing costs, but the situation presents risks. With inflation not peaking as expected in the first six months of the year, “hiking fatigue” could set in, warned Luis Oganes, head of Global Macro Research at JPMorgan.
“These central banks will be faced with the question of what they can at least increase in the second half of the year to anchor inflation expectations without pushing their economies into recession,” Oganes said.
In May, as it became clear that the Russian-Ukrainian conflict – and the inflationary shocks that flowed from it – would last longer than expected, 12 central banks from a group of 18 major developing economies raised rates. Eight more followed in June.
In total, emerging market central banks have raised interest rates by 4,415 basis points since the start of the year, compared to 2,745 basis points for the whole of 2021, according to the calculations.
“Ironically, even though emerging markets tightened much earlier and with greater force, inflation might not come down as quickly as in developed markets if food inflation continues to rise,” said Manik Narain, Head of Emerging Markets Strategy at UBS.
“In this respect, the biggest growth/inflation trade-off is probably found in emerging markets, not the United States.”
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