Global central bank rate hikes: part solution, part problem

Too little attention has been paid to the global rise in central bank policy rates in the past 6-7 months and its implications for economic growth, CPI-inflation and currency and rates markets.

Central bank rate hikes in Emerging Market (EM) economies, along in some cases with central bank FX intervention and other policy measures, have helped stabilise under-pressure currencies, particularly high-yielders.

Tighter EM monetary policy has in turn helped arrest the rapid rise in core and in particular headline CPI-inflation.

Moreover, developed central bank rate hikes have arguably contributed to relatively stable core CPI-inflation of around 1.5% yoy.

However, our analysis also suggests that the 50bp increase in the global policy rate over that period to a seven-year high of about 2.8% has contributed to a slowdown in global GDP growth to a seven-quarter low of about 3.2% yoy in Q4 from 3.6% yoy in Q2 and will continue to weigh on economic growth in coming quarters.

There is already compelling evidence that GDP growth slowed in the US and UK in Q4 and remained weak in the Eurozone.

We forecast that global GDP growth will slow below 3% next year which, along with lower international crude oil prices, will contribute to an easing in inflationary pressures.

If this scenario pans out, the risk is that the pace of global central bank rate hikes (including in the US) will moderate, potentially quite sharply.

This is a summary – Read the full research piece here