Over the course of this week, central banks across major developed economies have continued to raise interest rates in their fight against inflation. On Wednesday, the US Federal Reserve raised the benchmark interest rate by 25 basis points. On Thursday, the Bank of England increased interest rates by 50 basis points to a multi-year high of 4 per cent. Also on Thursday, the European Central Bank raised interest rates by 50 basis points. However, with data pointing towards a softening of prices, the commentary accompanying the policy announcements suggests that, globally, the monetary policy tightening cycle may be nearing its peak.
The signals from the central banks are clear. After hiking interest rates by 75 basis points in four consecutive meetings, the US Fed has in the last two meetings slowed the pace of its rate hikes. And inflation in the US has begun to trend lower — the consumer price index rose 6.5 per cent in December, down from the high of 9.1 per cent in June. As Jerome Powell, US Fed chairman, acknowledged, “inflation data received over the past three months show a welcome reduction in the monthly pace of increases.” Powell, however, cautioned that “we will need substantially more evidence to be confident that inflation is on a sustained downward path.” This indicates that while the fight against inflation is not yet over, the terminal rate — at which central banks will stop hiking and take a pause — is approaching. In a similar vein, even as the European Central Bank said that it “intends” to raise interest rates by another 50 basis points at its March meeting, the outlook for inflation is improving. Headline inflation dipped to 8.5 per cent in January, down from 9.2 per cent in December. The Bank of England’s latest forecast also expects inflation to ease from 10.5 per cent in December to less than 4 per cent by the end of the year, dropping below the target of 2 per cent in 2024.
Early next week, the monetary policy committee of the Reserve Bank of India will meet for the first time in this calendar year. Recent data released by the government shows that headline retail inflation has stayed below the upper threshold of the inflation targeting framework for two consecutive months. The Union budget has also stuck to the path of fiscal consolidation. The benchmark 10-year government bond yield has softened since its presentation, indicating that the markets are comfortable with the new fiscal’s sovereign borrowing programme. As monetary policy acts with a lag, a pause at this juncture would allow for the implications of the rate hikes carried out so far to be observed across the broader economy. While it is possible that the MPC may choose to opt for another rate hike, the growing dissent within the committee suggests that the rate hike cycle in India is also nearing its end.
