Central banks may raise risks by raising interest rates together

Moreover, the magnitude of these price increases is greater than usual. On September 20, Sweden’s Riksbank increased its benchmark rate by a full percentage point. It has not raised or lowered prices by more than half a point since its current framework was adopted in July 2002.

These central banks are responding almost globally high inflation. Inflation in the Group of 20 leading economies reached 9.2% in July, double the rate a year earlier, according to the Organization for Economic Co-operation and Development. Higher rates reduce demand for goods and services and reassure households and businesses that inflation will decrease over the next year.

But some worry that central banks are actively seeking national responses to a global problem of increased demand and rising prices. They warn that central banks as a group will go too far – and push the global economy into a deeper contraction than necessary.

“The current risk … is not that current and planned moves will ultimately fail to calm inflation,” Morris Obstfeld, former chief economist at the International Monetary Fund, wrote earlier this month in a note to the Peterson Institute for International Economics. He is an older fellow. “Collectively, they are going too far and sending the global economy into an unnecessarily harsh downturn.”

There is little sign that central banks will pause and Impact evaluation From the rate of increase so far. The Fed indicated on Wednesday that it is likely to raise interest rates by 1 percentage point to 1.25 percentage points during its next two meetings. JPMorgan economists expect central bankers from Canada, Mexico, Chile, Colombia, Peru, the eurozone, Hungary, Israel, Poland, Romania, Australia, New Zealand, South Korea, India, Malaysia and Thailand to raise interest rates at policy meetings scheduled through the end of October.

This is a collection of central bank firepower with few precedents. But do they all need to do so much if they are all doing the same thing?

Most economists accept that inflation in a country is not solely due to forces within that country. Global demand also affects the prices of goods and services that are easy to trade. This has long been evident with commodities such as oil. The boom in China drove prices up in 2008 even as the US slipped into recession. This was also true in recent years for manufactured goods, whose prices have soared around the world due to disruptions to supply chains, such as Asian ports, and rising demand from government stimulus. One federal study found that US fiscal stimulus drove up inflation in Canada and the UK

But the focus of the individual central bank on reconciling supply and demand at the national level can go too far, because other central banks are already weakening global demand which is one of the drivers of national inflation. If every central bank does this, global over tightening could be significant.

The World Bank shares Mr Obstfeld’s concerns, warning in a report that “the cumulative effects of the international spillover from too simultaneous tightening of monetary and fiscal policies could do more harm to growth than would be expected from a simple summing up of the effects of individual countries’ policy actions.”

This risk can be reduced through coordination between central banks – for example, when they cut key interest rates together during the global financial crisis. Similarly, in 1985 when advanced economies worked together to devalue the dollar, and then again in 1987, when they worked together to support it.

Federal Reserve Chairman Jerome Powell noted on Wednesday that central banks have coordinated interest rate actions in the past, but that doesn’t fit right now when “we’re in completely different situations.” He added that contact between global central banks continues in one form or another. “It’s not coordination, but there’s a lot of information sharing,” he said.

If coordination is not feasible, a more achievable goal may be, as the World Bank advised, for national policy makers to “take into account the potential ramifications of globally synchronized domestic policies.”

Mr. Powell suggested This is already happening. The Fed’s forecast always takes into account “policy decisions – monetary policy and more [and] “Economic developments taking place in major economies that could have an impact on the US economy,” he told reporters.

Many central banks are concerned about raising interest rates too small in the face of hyperinflation. “In this environment, central banks need to act aggressively,” ECB policymaker Isabelle Schnabel said in a speech in late August. “Restoring and maintaining confidence requires us to quickly get inflation back on target.”

“Informal coordination would be helpful,” said Philip Heimberger, an economist at the Vienna Institute for International Economic Studies. Systematic thinking about the impact of raising interest rates must take into account what other central banks are doing simultaneously. This would change the rules of the game.”

Mr. Heimberger said the Fed has a key role as the main driver behind rising global interest rates and that it should “seriously consider the implications of the rate-raising cycle for other parts of the world”.

Jill Muek, chief economist at the insurance company

axa SA,

It is doubtful that effective coordination can be achieved and he argues that in its absence, central banks should tread more carefully as they consider raising interest rates.

“Once monetary policy is in a constrained territory, I think it becomes dangerous to mechanically lift it at every policy meeting without taking the time to assess how the economy will respond,” said Mr. Moek. “The amount of new information between two meetings can be very small and the risk of overreaction increases.”

write to Paul Hannon at [email protected]