Brazil and Russia caught up via shock-and-awe rate hikes. But most central banks fell further behind. Then there are the reckless laggards.
By Wolf Richter for WOLF STREET.
The Bank of England today, February 3, started QT (Quantitative Tightening, the opposite of QE) and raised its policy rate by 25 basis points, to 0.50%, the second hike in a row, after having raised by 15 basis points at its December meeting. The hawkish part was how it happened: A bare majority of five members of the Monetary Policy Committee voted for the 25-basis-point hike, while four members voted for a 50-basis-point hike!
The BOE voted unanimously to start QT by reducing its holdings of government bonds by allowing maturing bonds to roll off without replacement, and by selling its corporate bonds outright. In terms of the corporate bonds, the BOE is following in the Fed’s footsteps which sold its corporate bond holdings entirely by November 2021.
The UK is getting hammered by inflation that has surged to 5.4%, the worst in four decades, and is hitting the standard of living of lower-income households particularly hard. The BOE expects inflation to surge to “around 7% in the spring.”
The Czech National Bank, also today, jacked up its policy rate by 75 basis points to 4.5%, the highest since January 2002, and the sixth rate hike in a row since June, totaling 425 basis points, including shock-and-awe hikes of 100 basis points in December and 125 basis points in November, which had been the biggest shock-and-awe rate hike in 24 years.
Unlike certain other central banks – the you-know-which reckless laggards at the bottom of this article – it’s actually battling inflation which spiked to 6.6%.
The Bank of Brazil, on February 2, jacked up its policy rate by another 150 basis points, to 10.75%, the eighth hike in a row since March, totaling 875 basis points.
The central bank said that the next rate hike might be smaller, on hopes that inflation is showing signs of responding to this shock-and-awe treatment. In November, inflation had hit a red-hot 10.7%, and in December it was slightly less red-hot at 10.1%.
With a policy rate of 10.75%, and a December inflation rate of 10.1%, Brazil is one of a few countries were the policy rate is above the rate of inflation, and therefore in real terms no longer negative, and therefore no longer stimulating inflation. By contrast, the Fed is a quadrillion miles behind.
The Central Bank of Armenia, on February 1, hiked its policy rate by 25 basis points, to 8.0%, the eighth hike in a row, including the 50-basis-point hike in December, from liftoff at 4.25%. Inflation backed off to a still red-hot 7.7% in December, from 9.6% in November.
The Bank of the Republic (Colombia), on January 28, jacked up its policy rate by a shock-and-awe 100 basis points, to 4.0%, the fourth hike in a row, totaling 225 basis points since liftoff in September. Inflation spiked to 5.6% in December.
The South Africa Reserve Bank, on January 27, hiked its policy rate by 25 basis points, to 4.0%, the second hike in a row, totaling 50 basis points.
Inflation spiked to 5.9% in December, at the top of the SARB’s target range of 3% to 6%.
The Central Bank of Chile, on January 26, dished out a shock-and-awe rate hike of 150 basis points, to 5.5%, the fifth hike in a row, starting in July, totaling 500 basis points, including two 125-basis-point hikes in December and October.
The central bank is battling inflation that spiked to 7.2% in December, the worst since 2008.
The National Bank of Hungary, on January 25, hiked its policy rate by 50 basis points, to 2.9%, the highest since 2013. The magnitude of the hike surprised economists who’d expected another 30-basis-point hike, as before. It was the eighth hike in a row, from liftoff in June at 0.6%.
Inflation, at 7.4% in November and December, was the worst since 2007. But core inflation spiked to 6.4% in December, the worst since 2002, up from 5.3% in November and 4.0% in September. The central bank pointed at stronger than expected inflationary pressure and sees core inflation increasing further over the coming months.
The State Bank of Pakistan, on January 24, paused with its policy rate at 9.75%, after three rate hikes totaling 275 basis points, including 100 basis points in December, and a shock-and-awe 150 basis points in October. Liftoff was in September from 7.0%.
Inflation spiked to 13% in January.
Norges Bank, the central bank of Norway, on January 20 paused after two rate hikes in December and September of 25 basis points each, to 0.5%. So far, it has raised its rate at every other meeting and is expected to hike by 25 basis points at its next meeting in March.
Inflation jumped to 5.3% in December, the worst since October 2008.
The Bank of Korea, on January 14, raised its policy rate by 25 basis points to 1.25%, the third hike since August, totaling 75 basis points. Inflation in December was 3.7%, following the 3.8% in November, the worst since 2012.
The Central Reserve Bank of Peru, on January 6, hiked its policy rate by another 50 basis points to 3.0%, the sixth hike in a row, since liftoff at 0.25%. Inflation backed off from 6.4% in December to 5.7% in January, same as in November.
The National Bank of Poland, on January 4, hiked its policy rate again by 50 basis points, to 2.25%, after the 50-basis-point hike in December, the fourth hike in a row, totaling 215 basis points, from liftoff at 0.1%.
Inflation spiked to 8.6% in December, the highest since 2000, up from 7.8% in November, from 6.8% in October, and 5.9% in September. Prices soared across many categories, including housing-related costs and utilities, food and beverages, and recreation and cultural activities.
The Bank of Mexico will meet on February 10. At its last meeting on December 16, it surprised by hiking its policy rate by 50 basis points, to 5.5%, the fifth hike in a row, totaling 150 basis points.
Inflation in Mexico has risen to 7.4% in November and December, the worst since January 2001.
The Central Bank of Russia will meet on February 11. At its last meeting on December 17, it hiked its policy rate by another 100 basis points to 8.5%, the seventh rate hike in 2021, totaling 425 basis points.
Inflation in January remained at the same red-hot pace of December, at 8.4%, over double the Bank of Russia’s target of 4%. Food inflation dipped to 10.6%. That inflation has stopped getting worse is raising hopes the shock-and-awe treatments are showing the first of results.
With a policy rate of 8.5% and an inflation rate of 8.4%, the Central Bank of Russia has joined the elite club of central banks whose policy rates have caught up with and surpassed inflation – Brazil being the other major one – thereby no longer stimulating inflation.
The Reserve Bank of New Zealand will meet on February 23. At its last meeting on November 24, it hiked its policy rate by 25 basis points to 0.75%, the second hike in a row. It already ended QE cold-turkey in July.
Inflation spiked to 5.9% in Q4, the highest since the 1980s. And the low interest rates and QE have inflated the worst housing bubble in the world.
The Central Bank of Iceland will meet on February 9. At its last meeting on November 17, it hiked its policy rate by 50 basis points to 2.0%, the fourth hike since liftoff in May from 0.75%.
Inflation has spiked to 5.7% in January, from 5.1% in December, the highest since 2012.
The Biggest Most Reckless Laggards
The Fed, on January 26, announced via Chair Powell at the FOMC press conference that it would hike its policy rate on March 16 and that it would start QT later this year. In November, it began tapering its asset purchases. It has since then accelerated the process of tapering and will end QE entirely in early March, just before liftoff.
But at the moment, the Fed’s target range for the federal funds rate is still 0% to 0.25%, and it is still doing QE even if at a much-reduced pace.
Meanwhile, CPI inflation spiked to 7.04%, the worst since 1982. With the Effective Federal Funds Rate at 0.08%, the “real” EFFR (EFFR minus CPI) is now at -6.96%, the most negative and worst ever.
The ECB, today, under massive pressure from spiking record worst inflation of 5.1% in the Eurozone, performed a policy U-turn and opened the door to a first rate hike in 2022. Lagarde is probably the world’s most dovish central banker, but with inflation eating everyone’s lunch in the Eurozone, she said today, “the situation has indeed changed.”
In December, the ECB announced a sharp reduction of QE from an average of €92 billion a month late last year, to about €40 billion by March, €30 billion a month in Q3, and €20 billion a month in Q4.
The Bank of Japan keeps emphasizing that it is not heading toward “normalization” of monetary policy. Its policy rate is still -0.1%. But it began tapering its ultra-massive QE in the fall of 2020 and since May 2021, its balance sheet has flattened out, regardless of what it said in its announcements.
Inflation has been rising even in Japan, to reach +0.8% in December, the highest since before the pandemic. But this rate of inflation is minuscule compared to the fiascos in the US and elsewhere, giving Japan one of the least negative “real” policy rates of -0.9%, compared to the US “real” EFFR of -6.95%.
The Reserve Bank of Australia, on February 1, announced that it would end QE on February 10. But it kept its policy rate at 0.1% and said that it would be “patient” in raising the rate. Inflation rose to 3.5% in Q4, faster than forecast.
The Bank of Canada ended is massive QE in 2021 and reduced its balance sheet by 13% as it shed its short-term Treasury bills and repos. At its meeting on January 26, it maintained its policy rate at 0.25%, but paved the way for a rate hike at its next meeting on March 2. Inflation has surged to 4.8% in December, the worst since 1991.
The People’s Bank of China has tiptoed back into easing by lowering its policy rates a tiny bit, bringing its Loan Prime Rate down by 10 basis points, to 3.7%. It is struggling with its own universe of problems, including the slow-motion collapse of the highly leveraged real estate development sector, whose activity – construction – was a huge contributor to economic growth. Inflation has eased to 1.5%.
The Central Bank of Turkey has become part of a joke on how to destroy a currency as quickly as possible. Amid raging inflation – it hit 49% in January – the central bank has been cutting its policy rate to 14%, from 19% in mid-2021, after Erdogan fired the head of the central bank. Erdogan is now trying to control this inflation rampage by firing the head of the statistics agency.
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