Central Banks Around the World Raise Rates as Fed Prepares Move

“Omicron presents a further sizable uncertainty,” said Freya Beamish, an economist at TS Lombard. “We think the inflationary impact at this stage of supply-side adaptation is likely to be much less significant than in previous Covid waves. For now, central banks appear to be looking through the threat to growth.”

While a lengthening list of central banks have or are poised to raise interest rates, central bank meetings this week underscored big differences in the perceived threat that inflation poses when set against the need to support fragile economic recoveries. A number of central banks in Eastern Europe and Latin America raised their key interest rates, but their counterparts in southeast Asia left theirs unchanged.

That may change in 2022, since developing economies usually find it difficult to avoid following the Federal Reserve, which has signaled it will likely raise its key rate three times next year. Central banks that leave their policy rates unchanged when the Fed is tightening policy run the risk of big falls in their currencies, which stokes inflation by raising import prices.

Before Russia’s decision, rate rises were announced this week by Mexico, Chile, Costa Rica, Pakistan, Hungary and Armenia. Many of those indicated that further rate rises will come next year.

The Russian central bank said it was worried that initial price rises driven by turbulence in global energy and food markets, as well as blockages in supply chains, may be leading to a second round of price moves.

“The impact of one-off supply-side drivers of inflation is translating into growing prices for a wider range of goods and services as inflation expectations of households and businesses remain high and unanchored,” it said.

Those concerns are shared by central banks in rich countries, who also worry about what policy makers call “second-round effects,” or the threat that higher inflation will prove to be self-reinforcing.

Those worries were at the forefront when the Bank of England raised its key interest rate Thursday, becoming the first major central bank to do so since the pandemic, and when the Fed set the stage for a series of interest rate increases beginning next spring.

The major central banks have moved later than their counterparts in developing countries for two reasons. First, they counted on households showing faith in their track records of keeping inflation low, while monetary authorities in many developing economies aren’t sure that they have that credibility. Secondly, households in poorer countries spend a larger share of their incomes on essentials such as food and energy that have seen the largest price rises, so policy makers are quicker to tamp down on inflation.

Even among developing countries there are differences. In meetings this week, the central banks of Indonesia, the Philippines, Egypt, Mauritius and Taiwan left their policy rates unchanged.

Policy makers in parts of Asia are less worried that inflation will surge, partly because they have seen fewer interruptions to supply chains, and don’t have as much cause to fret that a shortage of workers will push wages sharply higher.

Many are nursing recoveries that have proven fragile amid a recent surge in Covid-19 infections. For them, the Omicron variant is a fresh threat to an already weakened recovery.

“Downside risks to the economic recovery emanate from the emergence of new Covid-19 variants as well as the potential tightening of global financial conditions,” Philippines’ central bank said Thursday. “Hence, preserving ongoing monetary policy support at this juncture shall help sustain the economy’s momentum over the next few quarters.”

Some economists expect the majority of Asian central banks—with the exceptions of the Bank of Japan and the People’s Bank of China—to raise their interest rates in 2022, for fear of seeing capital flow to the U.S. as the Fed raises its rates. The recent experience of Turkey, which has chosen to repeatedly cut interest rates, serves as a warning. The Turkish lira has collapsed in value against the U.S. dollar, and inflation is surging.

“Asian central banks, with the notable exception, we think, of the PBOC, will raise rates next year by a similar magnitude as the Fed,” economists at Deutsche Bank said. “This is no accident: currency stability is an important policy concern.”

Write to Paul Hannon at [email protected]