Opinion Express View on global inflation and central banks: Stabilise prices

Last week, central banks across developed economies tightened policy further as they continued their fight against inflation. On Wednesday, the US Federal Reserve raised interest rates by 25 basis points taking the federal funds rate to 5.25-5.5 per cent — the highest level in 16 years. A day later, the European Central Bank also raised interest rates by 25 basis points. The Bank of England, which is scheduled to meet this week, is also expected to follow suit. With inflation still above their target, central banks have left open the possibility of further hikes when they meet next in September. However, there are indications that the interest rate hike cycle is nearing its end.

The US economy has so far proven to be more resilient to tighter policy than expected. In the second quarter (April-June), it grew at an annualised rate of 2.4 per cent, surpassing expectations. The unemployment rate remains at a low of 3.6 per cent, while claims for unemployment benefits fell for the week ended July 22. And inflation, based on the consumer price index, has come down from 9.1 per cent last year to 3 per cent in June. In contrast, the European economy has been rather sluggish. In the latest update of its world economic outlook, while the International Monetary Fund has revised upwards its growth forecasts for France, Italy and Spain, it expects Germany to contract this year. Inflation in the Eurozone, while has fallen from a high of 10.6 per cent in October to 5.5 per cent in June, remains well above target. ECB president Christine Lagarde has said that the bank’s governing council has “an open mind” on the decision in September. But, with inflation still way above the targets of central banks, it does suggest that interest rates are likely to stay higher for longer.

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In its last meeting, the monetary policy committee of the RBI had chosen to maintain the status quo on rates and stance. Inflation in India has moderated — it fell to a low of 4.3 per cent in May, rising slightly thereafter to 4.8 per cent in June. However, there are indications that the hardening of food prices, vegetables in particular, will have pushed up headline inflation significantly in July. The RBI’s own forecasts expect inflation to edge upwards in the second quarter. In this uncertain environment, the MPC, which is slated to meet in the second week of August, should continue to focus on price stability.