Central banks rush to quell inflation crisis they helped create

South Korea raised rates by a half point on Wednesday after several quarter-point moves. PHOTO: AFP

BOSTON (BLOOMBERG) - Central banks across the globe are speeding up interest rate hikes, seeking to crush an inflation surge partly of their own making.

Wednesday (July 13) saw Canada's central bank hike rates by a greater-than-expected full percentage point following two half-point moves, South Korea raise by a half point after several quarter-point moves, and New Zealand increase by a half point for a third straight meeting. Singapore's central bank unexpectedly tightened monetary policy on Thursday.

In the United States, another searing inflation report led to bets that the Federal Reserve would hike rates by a full point later this month following a 75 basis-point move in June. Investors say the Bank of England may deliver a 50 basis-point shift at its next meeting, double the previous pace, after the British economy proved surprisingly robust in May.

Lulled by two decades of subdued consumer prices, central bankers by their own admission assumed that cost pressures emerging in 2021 would soon dissipate. But supply chain snarls proved more lasting - and now the surge in energy and commodity prices after Russia's invasion of Ukraine has decisively removed any case for gradualism in combating inflation.

It is a pace that none of the central banks had penciled in just a few months ago, and it will likely deliver a growth shock that increases the risk of recessions. Fed chair Jerome Powell made clear last month that failing to get inflation under control would be a bigger mistake than overdoing the monetary tightening, in a sentiment echoed by his British and euro-region counterparts.

"Central banks will be minded to look through evidence of slowing growth until they are confident the inflation genie is being forced back into the bottle," Rabobank rates strategists Richard McGuire and Lyn Graham-Taylor wrote in a note on Wednesday. "We continue to believe that policymakers are willing to countenance triggering a recession if that is the extent to which they need to shift the demand curve in order to meet this aim."

In a world where many central banks are picking up the pace, those that lag behind are getting punished by weaker exchange rates - a dynamic that only worsens inflation, by making imports costlier.

The European Central Bank (ECB) has yet to start boosting its benchmark rate, and the euro on Wednesday slid below 1 per US dollar for the first time since 2002. That was in the wake of a report showing US inflation jumped to 9.1 per cent in June - spurring bets that the Fed will raise rates by at least 75 basis points at its July 26-27 meeting.

The euro then rebounded after an ECB spokesman said the central bank is attentive to the impact of the exchange rate on inflation - an illustration of the competitive pressures that some have termed reverse currency wars.

Refusing to go along with the trend is the Bank of Japan, with Governor Haruhiko Kuroda dismissing a pickup in inflation in his country as being mainly driven by commodities - not the kind of stable price increases he has been seeking.

Said Bloomberg Economics chief economist Tom Orlik: "In the end, monetary policymakers will get prices under control. That won't happen soon enough to save households from a major blow to their budgets, or central banks from a major blow to their credibility."

Follow ST on LinkedIn and stay updated on the latest career news, insights and more.