Stocksak: Aggressive rate increases are the new normal for big central banks


© Stocksak. Christine Lagarde, President of the European Central Bank (ECB), attends a news conference after the ECB’s monetary policies meeting in Frankfurt, Germany, October 27, 2022. REUTERS/Wolfgang Rattay


LONDON, Stocksak – On Thursday, the European Central Bank raised its interest rate by 75 basis points for the second time in a row. This is a sign that major central bankers are serious about reducing high inflation.

The 10 major developed economies have all raised rates by 2,165 basis points (bps) during this cycle, with Japan being the only exception.

But the pace of these rate rises is starting to slow – Canada just delivered a smaller-than-anticipated rate hike.

Here’s a look at the positions of policymakers, from hawkish-dovish.

Central banks ramp up fight against inflation


The Federal Reserve is expected increase rates by 75 base points at its policy meeting next Wednesday. This would be the fourth straight rate rise of such magnitude. It would bring rates to the 3.75%-4.00% range, which is part of the sharpest U.S. rate increases for about 40 years.

There are signs that the economy is slowing down, which has fueled speculation that the Fed might slow its aggressive monetary tightening. This would push the dollar to new two-decade highs.

Fed delivers another big hike


The Bank of Canada announced a smaller-than-expected rate hike on Wednesday and said it was getting closer to the end of its historic tightening campaign as it forecast the economy would stall in coming quarters.

It raised its policy rate by 50 basis point to 3.75%. This was short of calls for an additional 75-basis-point move. Rates have risen by 350 basis points in March, making it one of the most rapid tightening cycles.

Canada’s bid to tame inflation


The Reserve Bank of New Zealand announced earlier this month its eighth consecutive rate hike, and fifth consecutive rise of fifty basis points. This was to raise its policy rate from 3.50% to 3.50%. It is the highest rate in seven years.

In light of intense price pressures, even the RBNZ debated a larger 75 basis-point move.

New Zealand’s central bank is in the hawkish camp


The Bank of England will increase its rate by 75 basis points on Nov. 3, according to traders, in order to curb inflation that has reached a 40-year high of 11.1%. It increased its policy rate 50 basis points to 2.255% in September.

Traders had predicted that the policy rate would reach 3.75% by November at one point last month. However, after Liz Truss’s plan to cancel unfunded tax cuts and her resignation as prime Minister, traders now expect a much smaller increase.

Bank of England under pressure


Norway, the first major developed economy to start a rate-hiking period last year, saw its policy rates rise 50 basis points to 2.25% in Sept. Next Thursday, the Norges Bank meets.

Sustained hikes


The Reserve Bank of Australia delivered a smaller-than-anticipated 25-basis-point rate rise in October, saying it had raised rates substantially but adding that further tightening would be necessary.

This week’s data shows that Australian inflation rose to a 32 year high in the last quarter. However, this has fueled pressure to take a more aggressive stance.

The RBA has increased rates 250 basis points per month since May. This pushes its key rate to 2.60%, which is a nine year high.

RBA looks for a path back to inflation target


On Sept. 20, Sweden’s central banks raised its key rate by a larger percentage point to 1.75%. Riksbank, which will announce its next rates decision Nov. 24, warned that more rate changes are expected in the coming six months to curb inflation.

The rate increase last month was the largest since Riksbank adopted a target for inflation in 1993. It was equal in size and magnitude to the increase in November 1992, when a domestic financial crise pushed the main rate up to 500%.

Riksbank hikes to control surging inflation


On Thursday, the ECB raised rates and indicated that it was eager to shrink its bloated balance sheets. This is another major step in tightening policies to combat an unprecedented rise in inflation.

The ECB also reduced a key subsidy for banks, but did not mention plans to begin winding down its bond holdings. After hoovering up trillions in euros of debt issued euro zone governments between 2015 and 2015, the ECB has been unable to stop it from doing so.

ECB hikes policy rate by another 75bps


The Swiss National Bank raised its policy rates in September by another 75 basis point to 0.5% from below 0.25%. This ends the negative rate experiment in Europe.

It meets again in December. Markets have priced in a 50 basis-point rate rise.

SNB exits negative rates era


The Bank of Japan is the only major central bank to adopt a dovish policy and has kept benchmark bond yields at near zero.

The gap between Japanese yields, and those elsewhere, has led to a sharp decline in the yen, prompting intervention by Japanese authorities to stabilize the currency. There is no contradiction in intervening in bond and currency markets, according to policymakers.

The BOJ will meet on Friday and is expected maintain its loose stance.

Bank of Japan leaves rates unchanged

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Stocksak Editorial

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