Back to top

Image: Bigstock

A World Tour of Policy Rate Hikes

Read MoreHide Full Article

This is an excerpt from our most recent Economic Outlook report. To access the full PDF, please click here


With the Fed undertaking a taper, starting in November, I wanted to outline this:

Jerome Powell & Co. are very likely late in the cyclical game, and way behind many of their peers, in this rapidly expanding business cycle.

Usually, the Fed leads the way.

This time around, the European Central Bank (ECB) led the way on bond-buying tapering in September. Smaller central banks (aka Norway and South Korea) have been hiking policy rates since August.

Then, there are the more extreme central bank stories to share:

  • - Brazil’s central bank is already at a 7.75% Selic policy rate
  • - Russia is already at a 7.5% policy rate
  • - Our neighbor, Mexico, is already at a 4.75% policy rate

For stock investors, this spells out a major worry for 2022.

The Fed’s uber-slow hand gets forced. The Federal Open Market Committee (FOMC) starts to surprise vote to raise short-term Fed Funds rates, perhaps multiple times. The Dec. 2022 timeline for a first Fed Funds hike is truly suspect.

Swiftly moving higher U.S. monetary policy rates could well mean lower stock prices, folks.

Don’t worry though!

Another cautious non-economist central banker is at the helm of the ECB. Christine LaGarde and Company may be even further behind the curve than the Fed.

The ECB forecast is currently for no policy rate hikes until 2024.

Read on to examine the evidence and the state of play.

I. The USA

For a reference, to how hot or cold economies are across the world, let’s start here.

Consensus Economics in London shows USA October 2021 macro forecasts are for:

+5.7% GDP growth in 2021 and a core CPI at +4.4% y/y.

+4.1% real GDP growth in 2022 and a core CPI at +3.4% y/y.

If you put full employment attainment (3.5% versus 4.6% seen now) at the middle of 2022, the Fed will be well over its two statutory mandates, of maintaining frictional full employment and a +2.0% CPI.

It is appropriate to think Fed Funds rates move sooner than the consensus expects. Thinking is now for a December 2022 for liftoff.

Now, let’s turn to Europe.

There the ECB is quicker on the bond-buying taper, but could be much slower on the ECB policy rate hikes.

However, smaller independent countries not in the Eurozone are already hiking policy rates.

That is a foreboding sign there for an acceleration of policy rate hikes, too.

II. Europe

For reference, Consensus Economics in London shows us October forecasts are for:

+5.1% GDP growth in 2021 and a core CPI at +2.3% y/y.

+4.4% real GDP growth in 2022 and a core CPI at +2.0% y/y.

Keep this data in mind: the CPI for the Eurozone is forecast to be half the USA level. Outside the Eurozone, however, the CPI rates are much higher. Double, triple, or even quadruple the Eurozone (4% to 8%).

What’s happened to monetary policy in Europe?

The ECB has announced a reduction in monthly bond buying back in September. They plan to finish their bond buying taper earlier than the Fed. March 2022 they are scheduled to be done.

In Europe, the Swedes had gotten off of negative rates back in Dec. 2019. But they are staying pat with 0.0% policy rates for now. Their CPI was at +2.5% in September.

Norway lifted policy rates to 0.25% on Sept. 23rd. They moved first in Europe this fall. Norway’s CPI is at +4.1% — the highest rate of inflation seen since July 2016.

A week later, the Czechs moved policy rates a big 0.75% to 1.50% on Sept. 30th. The CPI hit +4.1% in August.

Poland has raised policy rates two times at 0.25% to get to 1.25% as of November 3rd. The CPI is +6.8% y/y in October.

Finally, Russia has hiked policy rates all the way to 7.5% on Oct. 22nd. Their CPI is somewhere between 7.4% to 7.9% y/y.

Juxtapose this with an ECB forecasted to keep policy rates on hold until 2024.

Hmmm. I have trouble believing the ECB will wait that long to raise their policy rates. The Western European economies collectively have similar GDP growth rates vis-à-vis the USA. (USA is 4 to 5% GDP growth, Eurozone is 4 to 5%, too.)

A. Sweden

Reason for a late 2019 hike to 0.0% policy rates: doubts over negative rates.

The Sveriges Riksbank left its repo rate at 0.0% during its September meeting as widely expected, saying monetary policy needs to remain expansionary for inflation to be lastingly close to the target going forward.

  • - Policymakers noted the Swedish economy has recovered quickly and inflation is expected to become temporarily higher than 2 percent in the coming year, before falling back again.
  • - The central bank will also continue to purchase securities during the fourth quarter, in line with the earlier decisions.
  • - The repo rate is expected to remain unchanged until at least the third quarter of 2024, while the holdings of securities will be more or less unchanged during 2022.

On December 19, 2019, the Riksbank raised its interest rate from -0.25% to 0%. In part, this increase (like the one implemented in December 2018 from -0.50% to -0.25%) was a reaction that came (voluntarily) late: the domestic health of the Swedish economy supported rate hikes in 2017 and 2018, but following a long period of low inflation, the Riksbank opted to prolong its accommodative monetary policy for a while longer.

However, its decision to raise rates now, in a context of a deteriorating economic outlook, was somewhat unexpected. Indeed, it suggests (at least in part) that the decision reflects doubts about the effectiveness of negative rates.

In fact, in a relatively explicit manifestation of these doubts, some members of the Riksbank stated that they preferred not to keep rates in negative territory unless the situation made it strictly necessary.

The doubts over negative rates

The Riksbank had kept rates negative since 2015, and one of the widely-argued reasons for raising them back up to 0% was related precisely to this time span: operating with negative rates for a short period of time is not the same as prolonging this environment for many years.

If such an environment persists, the compression of interest margins can end up eroding the capital positions of the financial system, increase the cost of access to credit for households and firms, and have a contractionary effect on the economy.

B. Norway

September 23rd, 2021. The 1st major European central bank to hike rates. Reason: a normalizing economy, with capacity-utilization close to normal.

According to CNBC:

Norges Bank on Thursday Sept. 23rd, 2021 become the first major Western central bank to raise interest rates following the onset of the coronavirus pandemic.

After cutting rates three times in 2020 due the economic fallout from the crisis, Norway’s central bank unanimously decided to raise rates to 0.25% from zero.

“A normalizing economy now suggests that it is appropriate to begin a gradual normalization of the policy rate,” said Governor Oystein Olsen in a statement Thursday.

The bank said that another hike is likely in December.

Norway’s currency rallied to its highest levels since June against the euro, and gained 0.7% against the U.S. dollar.

The rate hike comes as many central banks consider similar moves amid solid growth and surging inflation.

“The reopening of society has led to a marked upswing in the Norwegian economy, and activity is now higher than its pre-pandemic level. Unemployment has fallen further, and capacity utilization appears to be close to a normal level,” the bank added in the statement.

C. Czech Republic

A big 75 basis point hike on Sept. 30th, 2021, due to Consumer Price Inflation jumping to +4.1% y/y in August.

According to the Associated Press:

The Czech Republic’s central bank has significantly increased its key interest rate by three quarters of a point to 1.50%, in an effort to tame soaring inflation as the economy rebounds from the coronavirus pandemic.

Thursday’s move was the biggest single hike of the rate since 1997 and the third increase in as many months.

Analysts had mostly predicted a half-point increase. The central bank considers high inflation as a major threat.

Inflation jumped to +4.1% in August, well above the bank’s 2% target. The Czech economy registered a record +8.1% year-on-year growth in the second quarter, according to the country’s Statistics Office.

The last time the bank changed its rates was in August when it increased the key interest rate by a quarter-point to 0.75%, to tackle inflation.

D. Poland

Reason for 2 policy rate hikes in 2 months (October and November)? Consumer Price Inflation at +6.8% y/y.

According to the Associated Press, Poland’s central bank on Wednesday November 3rd 2021 made its second interest rate hike in as many months as consumer prices surge.

The National Bank of Poland raised the rate to 1.25%, indicating that it intends to move more forcefully against rising prices after facing criticism for not acting soon enough.

The move “suggests to us that it is taking the fight against inflation much more seriously than we had thought,” Capital Economics said in a note.

It comes after Eurostat, the European Union’s statistics agency, said Friday that Poland’s yearly inflation rate hit +6.8% in October. That’s among the highest in the 27-member European Union.

Inflation has been spiking worldwide in recent months because of soaring energy prices and pent-up demand during the pandemic recovery.

Consumer prices in Poland are at their highest in two decades — and appear set to rise even further.

The country’s deputy finance minister, Piotr Patkowski, said Tuesday that he expected inflation to reach +8.0% by the end of the year.

But the head of the National Bank of Poland, Adam Glapinski, said at a news conference after the interest rate announcement that he foresees inflation peaking at +7.0% in January and then declining.

Glapinski described the price surge in Poland and beyond as part of the “global” price being paid for actions taken by governments and central banks to avoid “large-scale economic disaster” during the pandemic.

He said that thanks to huge government spending and the actions of the National Bank of Poland, which kept interest rates at historic lows through the pandemic, “it was possible to save the economy from a deep recession.”

But he also pointed to factors beyond Poland’s control that are putting upward pressure on energy prices: Russian limits on gas exports, charges for greenhouse gas emissions imposed by the European Union, and oil prices set by OPEC.

Poland’s government, which is socially conservative but favors social spending to even out income inequalities, says it is planning energy vouchers for low-income families to limit the impact of rising energy prices.

E. Russia

Oct. 22, 2021: Reason for hikes? Consumer Price Inflation at +7.4 to +7.9% y/y in 2021.

According to the Moscow Times:

Russia’s Central Bank hiked interest rates to 7.5% on Friday as economists warned the country faces a triple threat of rising coronavirus cases, new lockdown measures and surging inflation.

The Russian economy recovered to its pre-coronavirus size earlier this year — a quicker recovery than first expected and faster than most other large economies — but now faces serious headwinds from both home and abroad.

The Central Bank said inflation was “developing substantially above forecast, and is expected to be within the range of 7.4-7.9% at the end of 2021” — a huge increase from the previous forecast of under 6% that was set in July.

Governor Elvira Nabiullina has taken an aggressive approach to taming inflation, and has warned for months that rising prices threaten to derail the Russian recovery.

Those fears prompted her to increase the Central Bank’s key interest rate by 0.75 percentage points to 7.5% — a more aggressive hike than financial markets were expecting.

The Russian ruble advanced on the news, gaining 1.4% against the U.S. dollar in trading to stand at 70.1, its strongest level since before the outbreak of the coronavirus pandemic last year.

F. European Central Bank (ECB)

Reuters wrote this outlook on October 22nd.

The European Central Bank will be one of the last major central banks to raise interest rates after the COVID-19 pandemic, according a Reuters poll of economists, who still say the risk is a rate rise comes sooner than their current prediction of 2024.

While the ECB has said the recent inflation surge will be transitory and has clearly indicated no policy tightening until it averages around its 2% target, financial markets are pricing in a hike later next year.

"Our baseline forecast is for the ECB to remain on hold through 2024, based on our assessment inflation is indeed transitory, and the expectations the ECB will continue to see it as such," said Bas van Geffen, senior macro strategist at Rabobank.

"But against the backdrop of higher inflation uncertainty, this does skew risks to an earlier move. That said, we consider current market pricing of a rate hike next year as excessive.”

The Oct. 18-21 Reuters poll consensus pointed to no rate rise through to the end of 2023, but nearly 90% of economists who responded to an additional question, 35 of 40, said the risk was it comes earlier than expected.

A steady view from ECB watchers but a change in market pricing comes at a time when most other major central banks, including the U.S. Federal Reserve and the Bank of England, are getting much closer to tightening policy.

The latest ECB poll results appear in line with the central bank's own view that inflation will be transitory and stay below target over the medium-term.

Poll medians showed the ECB deposit rate unchanged at -0.50% and the refinancing rate at zero through to the end of 2023. A smaller sample looking out more than two years showed the deposit rate at -0.30% and refi rate at zero by end-2024.

Three-quarters of economists who had a view that far in the future, exactly 18 of 24, expect at least one rate hike in 2024.

In September, the ECB took the first step towards unwinding the emergency aid that has propped up the economy during the coronavirus pandemic. It announced a reduction in monthly emergency bond buying this quarter, with the intention to end it completely in March 2022.

Asked about the volume of its regular asset purchases program (APP) beyond that date, the median of 29 responses showed 40 billion euros worth of bond buys compared with 20 billion euros each month presently. The highest forecast was for 65 billion euros.

That effectively means the ECB will shift some of the existing emergency bond purchases it closes into the regular program.

III. Latin America


Here is where you really see the big monetary policy rate hikes.

The Bank of Mexico (Banxico) is already at 4.75% policy rates. The CPI is +5.59% there.

Banco do Brazil is already at 7.75% Selic policy rates. Their CPI is at 10.25%.

A. Mexico

On Sept 30th, 2021, Banxico raised rates 0.25% to get to 4.75%. Their CPI was at 5.59% in August.

Reuters wrote that the Bank of Mexico raised its benchmark interest rate by 25 basis points to 4.75% on Thursday, as expected, in a four-to-one vote by its governing board, as the central bank expressed concern about above-target inflation.

All 22 analysts surveyed in a Reuters poll had expected the bank, known as Banxico, to raise the rate for the third time in a row to 4.75%.

"Although the shocks that have increased inflation are expected to be transitory, due to their variety, magnitude, and the extended horizon over which they have affected it, they may pose risks to the price formation process and to inflation expectations," Banxico said in its monetary policy statement.

In order to avoid those risks, Banxico said it deemed it necessary to hike the key rate.

Mexican consumer prices during the first half of September rose 0.42% to reach annual inflation of 5.87%, already edging above the 5.59% clocked for August, official data showed last week.

That is far above Banxico's target rate of 3.0%, plus or minus one percentage point.

B. Brazil

Brazil has now set off on its biggest rate hikes, ones not seen in two decades!

On Oct. 27th, we learned this from the Buenos Aires Times:

Brazil's Central Bank raised its benchmark interest rate by 150 basis points Wednesday, to 7.75% — its biggest hike since 2002 — as it struggles to tame surging inflation.

The increase, which was in line with analysts' expectations, is the sixth straight for Latin America's biggest economy, whose pandemic recovery is taking a hit from soaring prices.

It was decided unanimously by the nine members of the bank's monetary policy committee, who said in a statement a hike "of the same magnitude" was likely at its next meeting, in early December.

The Selic rate started the year at an all-time low of two percent, as policy makers sought to kick-start the economy after the devastation of the pandemic.

Inflation and exchange rate turmoil complicates the government’s re-election hopes.

But the Central Bank is now moving aggressively to raise the rate in order to tamp down the annual inflation rate, which came in at 10.25% last month – far above the bank's target ceiling of 5.25%.

Unemployment, meanwhile, remains high at 13.2%, though it has come down from 14.7% early this year.

IV. Asia

A. Japan

Behold! Another central banker slowpoke. Japan’s CPI rise is so tepid, the BoJ’s Kuroda is not even concerned about it.

In fresh quarterly estimates, the BOJ cut its consumer inflation forecast for the year ending in March 2022 to +0% from +0.6%. It also slashed this year's economic growth forecast on sluggish consumption and the hit to factory output from supply disruptions caused by the COVID-19 pandemic.

The projections highlight the policy gap between Japan and other economies.

"The BOJ is living in a totally different world as an outlier from the global trend," said Masamichi Adachi, chief economist at UBS Securities.

"Given tepid inflation expectations, the BOJ will stick to easing policy under yield curve control at least until Governor Kuroda and his two deputies serve out their terms in 2023."

B. South Korea

On Oct 12th, 2021, South Korea’s central bank kept policy rates steady at 0.75%. But they had hiked already in August, and are forecast to hike again in November.

Comparatively, this is a very hawkish (actually normal in times past) central bank governor. South Korea’s CPI rate was +2.1% in August and he hiked rates. The CPI went to +2.5% in September, and that was above +2.0%, so he will likely hike rates again.

Done. The ‘old way.’

According to Reuters, South Korea's central bank kept interest rates steady on Tuesday, October 12th, taking a breather after its first rate hike in nearly three years in August, but flagged further tightening could come as soon as November to curb rising inflation and household debt.

The Bank of Korea held benchmark interest rates steady at 0.75%, as widely expected in a Reuters poll, but increased its inflation forecast for this year.

In a rare remark on inflation, President Moon Jae-in also said during a cabinet meeting on Tuesday that the government should make every effort to stabilize consumer prices.

"The bank can consider raising interest rates further at the next meeting should the economic recovery proceed as expected, while monitoring how changes in internal and external conditions affect the domestic economy and inflation," said Governor Lee Ju-yeol during a news conference, retaining a hawkish tone adopted since May.

South Korea's three-year treasury bond futures fell more than 0.40 points following Lee's comments.

"Looking ahead, it is forecast that consumer price inflation will run at the mid-2% level for some time, exceeding the path projected in August, before declining somewhat," the BOK said in a statement.

The bank had projected 2021 inflation of 2.1% in August, above the central bank's 2% target.

Asia's fourth-largest economy grew a revised 6.0% in the second quarter from a COVID-induced slump a year ago, the fastest annual expansion in a decade thanks to robust exports of chips and petrochemical products. read more

The BOK reiterated it expected the economy to grow 4% in 2021 after shrinking 0.9% last year.


While a recent spike in daily COVID-19 cases has clouded the short-term outlook, the central bank is keen to contain a surge in private sector debt, a red-hot property market and building inflation pressures.

Annual consumer inflation reached 2.5% in September, staying above the BOK's target for a sixth month.

Most analysts in the Reuters poll had expected the BOK to hike rates in its next rate-setting meeting on Nov. 25 and then to raise them by a further 25 bps, taking the rate to 1.25% by the end of 2022.

"Governor Lee's comments were a bit more hawkish than expected," said Cho Yong-gu, a fixed income analyst at Shinyoung Securities.

"I expect the BOK to raise rates in November and saw the next one coming at around (the) third quarter (of) next year, but I am considering bringing that forward after today's press conference.”

In August, the BOK became the first major Asian central bank to start raising borrowing costs since the COVID-19 pandemic started, putting it ahead of the curve as central banks around the world seek to dial back emergency stimulus.

V. Conclusion

I concluded with the central bank narrative of South Korea, purposefully.

This country got the COVID response right, moving swiftly to test and trace.

Their central bank governor appears to be moving independently, and in accordance with the salient cyclical macro facts, too.

Why are the big central bank players hamstrung, this time around?

What say you: Fed, ECB, BoE and BoJ?

Published in