The cycle is turning

The great global post-Covid interest rate hiking cycle is ending. Nothing is ever certain, and there are a few notable outliers, but with inflation moving in the right direction in most countries, there is no reason to expect a further substantial tightening of monetary policy. Some central banks have even started cutting.

Importantly, it seems increasingly likely that the US Federal Reserve will not raise rates any further, given the improved labour market balance and easing inflationary pressures. This matters because the US Fed is the most influential central bank in the world, as its interest rate decisions reverberate into all corners of global markets. However, as Fed officials are at pains to remind us, they will not be in any hurry to cut rates until there is greater confidence that inflation is well and truly beaten. Minutes from the last policy meeting, released with a three-week lag, show that they believe it’s “critical that the stance of monetary policy be kept sufficiently restrictive” to ensure that inflation returns to the 2% target. The most recent reading of the Fed’s preferred inflation measure, the core personal consumption expenditure deflator (it is a mouthful; economists love their jargon), was 3.7%, much lower than the 5.1% peak, but still some way away from 2%.

The remarkable cycle
When we step back a bit, there are several remarkable elements to this global cycle. The first has been its synchronised nature. By the World Bank’s estimate, more central banks hiked rates simultaneously than at any time in the post-war era. Of course, this followed an equally synchronised cutting cycle when the Covid-pandemic engulfed the global economy. As chart 1 shows, the 2020 rate cuts came thick and fast, with several major central banks cutting more than once in March 2020. The subsequent hiking cycle has been more spread out, partly because central banks were initially unsure how big the inflation problem was. Some were slow off the mark, notably the US Fed, which at first viewed inflation as being the transitory result of supply chain disruptions, but once it got going, it moved with speed.

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