Economy | Monetary Policy

Central Banks Embrace Big Rises to Bolster Currencies and Flight Inflation

Jul 31, 2022   •   by   •   Source: FDC Ltd   •   eye-icon 78 views

A string of big rate rises by the Federal Reserve has put pressure on central banks around the world to follow suit to counter soaring inflation and the strong dollar. A Financial Times analysis found that central banks are now, more than at any other time this century, opting for large rate rises of 50 basis points or more, laying bare the challenges of tackling price pressures and higher US rates. Rises by the Fed, including its first 75 basis point increase since 1994, and fears over the health of the global economy, have bolstered the US dollar against almost all currencies. As many goods are priced in dollars on international markets, the strong dollar adds to inflationary pressures by raising the cost of imports — creating what analysts have described as a “reverse currency war” between monetary policymakers. “We’re seeing a rate hike feeding frenzy,” said James Athey, a senior portfolio manager at Abrdn, an investment company. “It’s the reverse of what we saw in the last decade . . . Nowadays the last thing anyone wants is a weak currency.” 



Canadian policymakers became the latest to surprise markets with a bigger than expected rise, opting for a 100 basis point increase on Wednesday, the largest by any G7 economy since 1998. The Philippines raised rates by 75 basis points the following day. In the three months to June, 62 policy rate increases of at least 50 basis points were made by the 55 central banks tracked by the Financial Times. Another 17 big increases of 50 basis points or more have been made in July so far, marking the biggest number of large rate moves at any time since the turn of the millennium and eclipsing the most recent global monetary tightening cycle, which was in the run-up to the global financial crisis. “We’ve seen this pivot point in the market where 50 is the new 25,” said Jane Foley, head of foreign exchange strategy at Rabobank. 


Central banks in countries acutely exposed to foreign exchange market pressure have increased rates by particularly large amounts. Hungary stands out, with its key policy rate up 385 basis points in just two months as the country faces inflation and currency depreciation 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 the global economics service at Capital Economics. They included several economies in emerging Europe whose currencies had been hit by concerns about the Ukraine war as well as a general environment of risk aversion, she said. But the trend is broad-based and has affected central banks in richer countries too. South Korea’s central bank made its first 50 basis point increase in July. 


Many of the large moves have wrong-footed investors, including in Australia, Norway and Switzerland, where the central bank unexpectedly made a 50 basis point rise in June. Markets had forecast the traditionally dovish Swiss National Bank would wait until later in the year to raise rates, but concerns about inflation and the exchange rate led policymakers to act sooner


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