A few months ago, central banks all over the world were working together to control inflation, which was their common goal. And, by pursuing unprecedented interest rate hikes, they were able to dampen the momentum of price rises. While global inflation remains a concern, it is likely that the time has come for central bankers to take a stand based on domestic economic conditions. Today, global central bankers are taking a different stance and doing what is necessary for their own economies.
Against the backdrop of the banking crisis in the US and Europe, major global central banks are taking a cautious approach now. The US Fed and the Bank of England lifted their key policy rates by 25 basis points, while the ECB announced a 50 basis point increase.
“Going ahead, while ECB has vowed to maintain its hawkish stance, investors are split in the case of BoE and US Fed. While in the case of BoE, there is a 50-50 chance that it may opt for a pause, in the case of the Fed, the likelihood currently stands at 59%, owing to a slowdown in growth. BoJ and PBOC (China) on the other hand will maintain a loose monetary policy for now,” says Sonal Badhan, Economist, Bank of Baroda.
India’s central bank, the Reserve Bank of India, decided against raising its benchmark interest rate and instead said that it may do so if necessary. The six-member Monetary Policy Committee of the Reserve Bank of India unanimously decided to hold the repurchase rate at 6.50%.
The RBI’s action comes after the Reserve Bank of Australia took the decision to pause rate increases on Tuesday. However, similar to the RBI, a day later, it also declared that the decision did not signal the end of its cycle of tightening.
The central bank of Australia kept the cash rate unchanged at 3.6% after raising rates for ten consecutive periods, as policymakers accounted for policy lags.
Going contrary to India’s RBI and Reserve Bank of Australia’s action, New Zealand’s central bank (RBNZ) raised borrowing costs by more than expected, amid overheated inflation and employment. With its unexpected half-point increase, the RBNZ has tightened rates by a total of 5 percentage points, surpassing the Federal Reserve’s 4.75 points.
Although there were indications that both inflation and the domestic economy were declining, authorities in New Zealand believed that inflation was still too high. In Q4 2022, New Zealand’s annual inflation rate decreased marginally to 7.2%, but it remained very near its highest level since Q2 1990.
The focus now shifts to the US Federal Reserve. The next FOMC meeting is on May 2-3 and the market expects a rate hike of 25 bps followed by a pause in rate hikes.
In the US, a sharper-than-expected slowdown in both private employment growth and service sector activity expansion added to market speculation that the Federal Reserve might pause hiking of interest rates in May.