Let the Rate Hike Arms Race Begin!
The real question isn’t whether or not to raise the cost of borrowing. It’s about how fast and when to start.
There’s more to watch than the Olympics.
Photographer: Noel Celis/AFP via Getty Images
The idea that some central banks are charging ahead with interest rate hikes to quell inflation while others take a more relaxed view is subject to serious challenge. For a year that was supposed to be marked by a big global split in monetary policy, authorities are starting to sound pretty similar. This unusual moment of relative agreement could mean that the market upheaval we’ve seen in recent weeks could start to subside.
In Europe and the U.K., nasty inflation surprises are pushing central banks to respond quicker and more aggressively than anticipated. The prospect of higher rates in the euro zone — just days ago considered a question for 2023 — is suddenly on the agenda after European Central Bank President Christine Lagarde on Thursday cited “across the board” anxiety about record price gains. Hours earlier, the Bank of England raised its benchmark rate by a quarter point, but came close to shocking investors with a half-point increase for the first time since the institution gained independence in 1997.
In Australia, long seen as a dovish outlier, comments this week from Reserve Bank Governor Philip Lowe mean higher borrowing costs are plausible this year. At the Federal Reserve, all three nominees to join the Board of Governors placed a high priority on tackling inflation when they were vetted by U.S. lawmakers this week.
All this is to say that the hawk versus dove descriptions are looking stale and overly simplistic. Most economies are now moving in the same direction. In many instances, the arguments are no longer about whether to hike, hold or cut. They are about how quickly to respond to inflation with rate increases.
The only true outlier — and admittedly a big one — is China. More juicing, not tightening, is likely from Beijing. Japan, considered to be in perennial loose mode, has ruled out an increase. But some fiddling with quantitative easing is conceivable. The Bank of Japan has taken a more robust view of inflation risks, raising its forecasts slightly. The end of Haruhiko Kuroda’s second term as governor early next year provides an opportunity to pivot.