Rate hikes echo around the world as inflation proves unrelenting

Frankfurt - Central bankers’ mounting concern that inflation remains undefeated is locking them into a new phase of monetary tightening on economies already jolted by a year or more of rate hikes.

The official start of summer in the Northern Hemisphere this week coincided with a British report showing alarmingly stubborn price gains. At the same time, United States Federal Reserve chairman

Jerome Powell warned that another two increases in borrowing costs may well be needed.

Within hours of that outlook from the Fed, both the Bank of England and its Norwegian counterpart each accelerated their tightening with half-point rate moves on Thursday, and promised more to come.

Swiss officials showed they are not ready to call time on monetary action either, even with inflation near 2 per cent.

The aggregate outcome is that a month that began with the prospect of breathing room amid an expected pause by the Fed is now on course to end in a newly concerted state of alert over prices. And it leaves the economic outlook under a cloud, with little offer of relief from escalating borrowing costs in coming months.

“Exhibit A” for the need for monetary aggression is Turkey, where rampant inflation near 40 per cent finally forced President Recep Tayyip Erdogan’s hand to allow tightening to begin on Thursday.

“Exhibit B” could be Britain, which is struggling to contain annual consumer price gains still running above 8 per cent.

“Inflation is still too high, and we’ve got to deal with it,” Bank of England governor Andrew Bailey told reporters in London, where a heatwave is taking hold.

“We know this is hard – many people with mortgages or loans will be understandably worried about what this means for them. But if we don’t raise rates now, it could be worse later.”

Mr Bailey took an embarrassed spotlight centre stage in global markets on Thursday, a day after the country’s statistics agency revealed an underlying measure of inflation – which strips out volatile items such as energy – had accelerated to a 31-year high.

The result forced British policymakers to double the pace of hiking, despite markets pricing in only a 40 per cent chance of that, bringing their benchmark interest rate up to a 15-year high of 5 per cent.

While that decision responded to the domestic shock of sticky consumer prices, it was also the culmination of over a week of gear-changing by global monetary authorities, starting with the Fed’s pause on Wednesday that also pencilled in renewed tightening as soon as July.

“The process of getting inflation down to 2 per cent has a long way to go,” Mr Powell told the House Financial Services Committee on Wednesday.

On June 15, meanwhile, the European Central Bank also projected a rate increase for next time to add to the one officials just delivered.

Hawkish policymakers then aired the prospect that they will not be able to stop there, even though the subsequent decision is almost three months away.

A week later, and Norway also sharply raised its outlook for its peak for rates, meaning more moves will likely be needed to contain inflation in the country that has been partly fuelled by the krone, the second-worst performer in 2023 in the Group of 10 sphere of currencies.

And Switzerland, where so-called core inflation is now even below the 2 per cent ceiling targeted by officials, is not taking any chances.

Officials dialled down tightening with only a quarter-point move – the smallest increase so far – but then cautioned that they are not done.

“We are not at the end – most likely there could be more rate hikes necessary in order to bring inflation on a permanent basis below 2 per cent,” Swiss National Bank president Thomas Jordan told Bloomberg Television in Zurich.

Similarly, Turkey’s central bank pledged further tightening, but cautioned that future steps would be gradual, in line with guidance from Treasury and Finance Minister Mehmet Simsek. BLOOMBERG