The era of the global central bank may have arrived


The dangers of following the Joneses. The relentlessness with which central banks are raising interest rates reflects concern about rising prices – and an aversion to being portrayed as insufficiently brave in a time of economic peril. With so many rides, officials should be concerned about the wider impact of the course they are on. The recession they are courting may not be an ordinary downturn.

According to the World Bank, we are living through one of the most synchronized periods of monetary and fiscal tightening in the past five decades. While the Federal Reserve could steal the show on Wednesday with a third consecutive 75 basis point hike, rates will almost certainly rise in the coming days in places as diverse as the UK, Indonesia, the Philippines and Norway. . Earlier this month, the European Central Bank pulled off its first 75 basis point jump and left the door open for others. Sweden’s Riksbank shocked the markets on Tuesday by raising its key rate by one percentage point.

It is the countries that have not raised their borrowing costs – often by significant margins – that stand out. The era of the global central bank may be with us in all but name, as much as policymakers themselves would bristle at the suggestion. About 90 central banks have raised rates this year, and half of them have raised at least three-quarters of a percentage point all at once, according to calculations by Bloomberg News. This week’s increases alone could exceed 500 basis points.

Even outliers are far from comfortable. The Bank of Japan, which has refused to budge, faces tough questions about why it is clinging to an ultra-dovish stance as inflation has well and truly exceeded its 2% target. Inflation hit its highest level in more than three decades last month. China is trying to sustain a fragile expansion, although authorities are worried about inflation and reluctant to trigger massive stimulus. (Such an approach by the People’s Bank of China would be of limited effectiveness, given Beijing’s Covid-zero strategy that has locked down huge cities.)

He’s a brave central banker who worries too much about other countries when headlines scream about inflation at home and politicians pile in. Most monetary agencies have at least some autonomy, but they still operate in a political environment. Policymakers face hostile questions in parliamentary hearings and some lawmakers go so far as to call for resignations. It’s an understandable, if disappointing, reaction when CPI jumps top the evening news. If officials are worried about the lackluster performance of the global economy – and there are good reasons to be worried – they tend to remain publicly mum about it.

One person who has signaled the need to think globally is Fed Vice Chairman Lael Brainard. While she didn’t for a minute dispute the advisability of dampening demand and prices, she kept an eye out for the potential consequences of the global policy stall. “The speed of the tightening cycle and its global nature, as well as the uncertainty about the pace at which the effects of tightening financial conditions trickle down to aggregate demand, create risks associated with excessive tightening,” Brainard said in a statement. Sept. 7 speeches. A gloomy global outlook could also prevent the Fed from moving a full percentage point today, according to Bloomberg Economics.

In other words, the picture of the world collapsing will prevent a giant hike from turning into a mega hike. But that’s about all, for now. While World Bank economists don’t have a global crisis as their baseline scenario, they are pessimistic. Drawing on information from previous recessions, a paper published last week noted that every global decline since 1970 was presaged by significant weakness the previous year. “These developments do not bode well for the likelihood that a global recession can be averted,” wrote Justin Damien Guenette, Mr. Ayhan Kose and Naotaka Sugawara. It could presumably resemble the 1982 vintage, they said. It was the slide that followed then-Fed Chairman Paul Volcker’s assault on inflation. As inflation was defeated and Volcker earned his place in the pantheon of economic history, the economy was strangled in the process.

There is a danger now that, acting on national concerns, the response to higher inflation will reverberate far beyond national borders. “Because these policies are highly synchronous across countries, they could compound each other in their effects – tightening financial conditions and deepening the global growth slowdown more than expected,” according to Guenette, Kose and Sugawara. .

A rallying cry for central bankers whenever politicians make noise about rates is to protect autonomy at almost any cost. But what about central banks that are independent of each other, especially the Fed? The impact of the whole can be greater — and keenly felt — than the sum of the parts. An atlas can be as useful as dot charts at this stage.

More from Bloomberg Opinion:

• If rate hikes are on autopilot, just say so: Daniel Moss

• The Case Against a Mega 1% Fed Rate Hike: Robert Burgess

• The Fed wants to save America, not the world: Marcus Ashworth

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously, he was Bloomberg News’ economics editor.

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