The world’s central banks are divided as to whether they should raise or lower interest rates or keep them the same. Different experiences with inflation and monetary policy mean diverse options and decisions. Selected interest rates from around the world are illustrated on the table below.
There is one group that is lowering rates to stimulate more growth. China is gradually edging rates down and trying to alleviate the credit squeeze the government created to tackle property excesses. Brazil, Poland, and Chile think their work is done on inflation and they can afford to start cutting.
At the other extreme Turkey has just seen two hikes of 7.5% and 5%, bringing base rates to 30%, and Russia a 1% hike to 13% as each nation seeks to check rising prices. Turkey has run a very expansionary inflationary policy for too long and needs to rein in. Argentina and Venezuela also have very high inflation.
Fed interest rate decisions have impacts further afield
Many central banks are now pausing, asking themselves whether the rate rises that have come fast and furious this year are sufficient to contain the inflations that had been triggered. The US Federal Reserve Board (the Fed) still has considerable influence over world rates. Many countries are conscious of the need to avoid undue depreciation of their currencies against the dollar and so need to keep their interest rates linked to US dollar rates to avoid a big sell-off. Last week the Fed gave pause to its long set of rate rises and said it will now be data-driven as to whether any more needs to be done.
The markets think we are now within sight of the peak if not at it. The Fed is indicating higher for longer in its forecasts.
There is a reasonable chance the Fed will be able to bring inflation down a bit closer to the 2% target without having to trigger a recession and without having to drive rates much higher. That would be a good outcome. US progress in curbing inflation has been more successful than Europe’s this year, and the US economy has proved more resilient to the tough medicine of higher rates.
The European Central Bank trails
The Europeans were slower to raise rates, have reached a lower likely pausing point at 4.5%, and have seen Germany, their lead economy, enter a mild recession. The Czech Republic and Hungary with higher rates have been on pause for some time, whilst Sweden and Norway joined the European Central Bank (ECB) with a September rise. There is less scope for the ECB to cut rates given the stickiness of inflation, whilst the weak levels of activity and the wish to avoid undue stress in any part of the zone is likely to deter the ECB from further rises.
What’s the global outlook for interest rates?
India and Mexico last raised rates in February and March respectively. They are looking for opportunities to cut. Whilst the Indian Central Bank claims independence of the government it will be conscious of Mr Modi’s wish to be re-elected next spring and aware that growth is an important part of the government’s programme.
Overall, it seems likely that world interest rates relative to world GDP are now starting a slow descent from the peaks they reached. Lower inflation rates or faster falls in inflation give some central banks more scope to cut, whilst economies falling into no growth or recession from the tightening will make more cuts more likely.
Higher and rising interest rates hit share markets badly last year, but as this year advances investors can get a better view of the impact of the higher rates and start to look forward to reaching the peak and beginning the descent. The US and European central banks will continue to play down the scope for cuts all the time inflation, and especially wage inflation in service industries, remains above target.
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