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Making sense of the new interest rates dynamics
Even if domestic inflation is relatively well managed, we might start making sense of the interest rate hike as a pro-stability measure at the central bank’s disposal.
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A cyclist passes the Federal Reserve building in Washington, DC, on Aug. 22, 2018. (Reuters/CHRIS WATTIE)
T
oday, we live in a world where higher interest rates persist. Bank Indonesia (BI) decided to raise its BI seven-day reverse repo rate (BI-7DRR) by 25 basis points to 6 percent on Oct. 19 after leaving it unchanged for nine months.
Tighter monetary policies are being implemented throughout the world, mainly to curb stubborn inflation. Some major central banks have opted to hold their already-high interest rates.
The United States Federal Reserve (Fed) decided to hold its 22-year high benchmark rate at between 5.25 and 5.5 percent at its meeting on Nov. 1, after raising it 11 times to cool off inflation. The Bank of England (BoE) has opted to hold interest rates at 5.25 percent, their highest level since 2008, on Nov. 2. The European Central Bank (ECB), in its latest policy meeting, decided to leave the rate unchanged at 4 percent, following 10 consecutive rate hikes.
The measure is consistent with any monetary policy textbook. When inflation rises, the central bank fights it off by raising the policy rate. We can see synchronized orchestrations both in developed and emerging economies.
Central banks are geared up with a price stability mandate. On the other side, even if they manage to tame inflation, emerging economies are urged to defend their economies from externalities that arise due to other central banks’ actions. Internationally, it can disrupt global economic progress. The International Monetary Fund has issued an outlook of global growth at 3 percent this year, slower than the 3.5 percent projection in 2022, and it will slightly decrease to 2.9 percent in 2024.
There were times when the world suffered from much worse double-digit hyperinflation. Since then, the monetary policy framework has evolved toward a better shape to safeguard the economy, among other methods, through inflation-targeting frameworks. It is true, though, that we bear challenges in our own time.
The COVID-19 pandemic-induced crisis and global geopolitical tensions seem to be the apparent root cause of today’s upward prices. While it is worthwhile learning from the past, there are recent dynamics that should be anticipated and thus be mitigated and, finally, resolved.
