Central bankers’ mounting concern that inflation remains undefeated is locking them into a new phase of monetary constriction on economies already jolted by a year or more of interest-rate hikes.
Summer’s official start in the northern hemisphere this week coincided with a UK report showing alarmingly stubborn price gains and Federal Reserve Chair Jerome Powell’s warning that another two increases in borrowing costs may well be needed.
Within hours of that outlook from the Fed, both the Bank of England and its Norwegian counterpart each accelerated their tightening with half-point rate moves on Thursday, and promised more to come. Swiss officials showed they’re not ready to call time on monetary action either, even with inflation near 2%.
The aggregate outcome is that a month that began with the prospect of breathing room amid an expected pause by the Fed is now on course to end in a newly concerted state of alert over prices. And it leaves the economic outlook under a cloud, with little offer of relief from escalating borrowing costs in coming months.
“Exhibit A” for the need for monetary aggression is Turkey, where rampant inflation near 40% finally forced President Recep Tayyip Erdogan’s hand to allow tightening to begin on Thursday. “Exhibit B” could be the UK, which is struggling to contain annual consumer-price gains still running above 8%.
“Inflation is still too high and we’ve got to deal with it,” Bank of England Governor Andrew Bailey told reporters in London, where a heat-wave is taking hold. “We know this is hard — many people with mortgages or loans will be understandably worried about what this means for them. But if we don’t raise rates now, it could be worse later.”
Bailey took an embarrassed spotlight center stage in global markets on Thursday, a day after the country’s statistics agency revealed an underlying measure of inflation — which strips out volatile items such as energy — accelerated to a 31-year high.
The result forced UK policymakers to double the pace of hiking, despite markets pricing in only a 40% chance of that, bringing their benchmark interest rate up to a 15-year high of 5%.
While that decision responded to the domestic shock of sticky consumer prices, it was also culmination of more than a week of gear-changing by global monetary authorities, starting with the Fed’s pause last Wednesday that also penciled in renewed tightening as soon as July.
“The process of getting inflation down to 2% has a long way to go,” Powell told the House Financial Services Committee on Wednesday.
Last Thursday, meanwhile, the European Central Bank also projected a rate increase for next time to add to the one officials just delivered. Hawkish policy makers then aired the prospect that they won’t be able to stop there, even though the subsequent decision is almost three months away.
A week later, and Norway also sharply raised its outlook for its peak for rates, meaning more moves will likely be needed to contain inflation there that has been partly fueled by the krone, the second-worst performer this year in the Group of 10 sphere of currencies.
“We have seen over time that volatility and uncertainty in international financial markets have contributed to a risk premium on the Norwegian currency,” Governor Ida Wolden Bache said in an interview. “We expect that will narrow somewhat going forward, but we project a weaker exchange rate than we did in our previous report.”
And Switzerland, where so-called core inflation is now even below the 2% ceiling targeted by officials, isn’t taking any chances. Officials dialed down tightening with only a quarter-point move — the smallest increase so far — but then cautioned that they’re not done.
“We are not at the end — most likely there could be more rate hikes necessary in order to bring inflation on a permanent basis below 2%,” Swiss National Bank President Thomas Jordan told Bloomberg Television in Zurich.
Similarly, Turkey’s central bank pledged further tightening, but cautioned that future steps would be gradual, in line with guidance from Treasury and Finance Minister Mehmet Simsek.
That wasn’t enough to impress markets, which had expected a much bigger hike. The Turkish lira slumped as much as 4.3% and the country’s dollar bonds erased gains to trade lower on the day, and the cost to insure Turkish debt against default using credit-default swaps jumped 36 basis points to 529.