A series of sharp rate hikes by the Federal Reserve has put pressure on central banks around the world to follow suit to counter soaring inflation and the strong dollar.
Financial Times analysis has found that central banks are opting now, more than at any other time this century, for steep rate hikes of 50 basis points or more, laying bare the challenges of fighting pressures on prices and rising US rates.
Fed hikes, including its first 75 basis point increase since 1994, and fears about the health of the global economy, supported the US dollar against nearly every currency. As many goods are priced in dollars in international markets, the strong dollar is adding to inflationary pressures by raising the cost of imports, creating what analysts have described as a “reverse currency war” between monetary policymakers. .
“We are seeing a rate hike feeding frenzy,” said James Athey, senior portfolio manager at Abrn, an investment firm. “It’s the reverse of what we’ve seen in the last decade. . . These days, the last thing you want is a weak currency.
Canadian policymakers became the latest to surprise markets with a bigger-than-expected hike, opting for a 100 basis point hike on Wednesday, the biggest of any G7 economy since 1998. The Philippines hiked rates by 75 basis points the next day.
During the three months preceding June, 62 key rate hikes of at least 50 basis points were made by the 55 central banks tracked by the Financial Times. So far, 17 other significant increases of 50 basis points or more have been made in July, marking the most significant rate moves at any time since the turn of the millennium and eclipsing the most recent global monetary tightening cycle. recent, which was ongoing. -until the global financial crisis.
“We saw this pivot point in the market where 50 is the new 25,” said Jane Foley, head of currency strategy at Rabobank.
The central banks of the countries highly exposed to the pressures of the foreign exchange market increased their rates in particularly significant proportions. Hungary stands out, with its policy rate up 385 basis points in just two months as the country grapples with inflation and a depreciation of the currency against the dollar at double-digit rates.
The exchange rate component is important in monetary policy decision-making for many emerging markets, said Jennifer McKeown, head of global economics at Capital Economics. They included several emerging European economies whose currencies had been hit by concerns over the war in Ukraine as well as a general environment of risk aversion, she said.
But the trend is widespread and has also affected the central banks of rich countries. South Korea’s central bank made its first 50 basis point hike in July.
Many of the big moves caught investors off guard, notably in Australia, Norway and Switzerland, where the central bank hiked an unexpected 50 basis points in June. Markets had expected the traditionally dovish Swiss National Bank to wait until later in the year to raise rates, but concerns about inflation and the exchange rate prompted policymakers to act earlier.
In most advanced economies, rates are rising from all-time lows following aggressive central bank easing in the early months of the Covid-19 pandemic. With rates still low by historical standards, economists expect several major central banks to raise rates by 50 basis points or 75 basis points at their next rate-setting meetings to bring costs closer together. borrowing from longer-term averages.
McKeown said central banks need to act quickly to get rates out of “boosting” territory, “especially in an environment where wage growth and inflation expectations are rising and there is a risk that inaction will allow wage-price spirals to develop”.
The Bank of England and the European Central Bank have yet to make such large rate hikes. However, Matthew Ryan, senior market analyst at global financial services firm Ebury, said the BoE “will likely have to join the ’50 club’ in order to lift the pound from its currently suppressed levels.”
The euro reached parity with the dollar this week, but the ECB, which meets on July 21, is expected to raise rates by 25 basis points more modestly.
Strong jobs data and higher-than-expected inflation in June bolstered expectations of another big rate hike by the Fed at its next July 27 meeting. Markets are even pricing in a 40% chance of a full one percentage point hike, and expect the fed funds target range to reach between 3.5 percent and 3.75 percent by the end. of the year.
Further increases from the Fed will put pressure on many emerging markets to catch up, even though many began tightening monetary policy last year, earlier than advanced economies.
Agustín Carstens, chief executive of the Bank for International Settlements, told a recent conference hosted by the ECB that emerging markets had “learned the lessons” from previous rounds of US tightening. He said that while traditionally emerging markets raised interest rates after their counterparts in advanced economies, “now they started very early and what you can see is that they managed to hold their rates fairly stable exchange rates”.