Central banks around the world are becoming increasingly concerned about the persistent issue of inflation and its impact on the global economy. As a result, they are implementing new measures to constrain it, even though many economies have already been jolted by more than a year of rising interest rates.
The start of the northern hemisphere's summer season coincided with a report from the UK, revealing that price rises were still stubbornly consistent. Federal Reserve Chair Jerome Powell warned that another two increases in borrowing costs may be necessary. The Bank of England and its Norwegian counterpart responded within hours, with each accelerating their tightening with half-point rate moves on Thursday and promising more to follow. Swiss officials showed they were also willing to continue with monetary action, even with inflation hovering at around 2%.
However, the new phase of monetary constriction is leaving the global economy under a cloud, with little relief in sight from escalating borrowing costs in the coming months. Turkey has been seen as an example of why monetary aggression is needed, where rampant inflation levels that are close to 40% have forced President Recep Tayyip Erdogan to allow tightening measures to be put in place.
In the UK, annual consumer-price gains are still running at over 8%, making it a prime candidate for why monetary aggression is required. "Inflation is still too high and we've got to deal with it," Bank of England Governor Andrew Bailey told reporters in London. The embarrassing spotlight landed on Bailey, a day after the country's statistics agency revealed that an underlying measure of inflation had hit a 31-year high. Despite the markets only pricing in a 40% chance of a doubling in the pace of interest rates, UK policymakers brought their benchmark interest rates up to a 15-year high of 5%.
This is the culmination of more than a week of global monetary authorities making gear changes since the Federal Reserve's pause last Wednesday that pencilled in renewed tightening as soon as next month. "The process of getting inflation down to 2% has a long way to go," Powell told the House Financial Services Committee last week. The European Central Bank also projected a rate increase for next time, with some hawkish policy-makers airing the prospect that they will need to continue increasing rates past that decision in three months' time.
Norway also sharply raised its outlook for its peak rates, which means more moves will be needed to contain inflation. Meanwhile, Switzerland, where core inflation is already below the 2% target, still elected to tighten its grasp on the economy with a quarter-point move.
Despite the fact that central banks are promising further tightening to contain inflation, they are being cautious about making sudden shifts. The Turkish central bank, for example, pledged further tightening, but warned that future steps would need to be gradual and in line with guidance from Treasury and Finance Minister Mehmet Simsek. However, this approach did not impress markets, who were expecting a much larger hike. The Turkish lira slumped by up to 4.3%, the country's dollar bonds erased gains to trade lower on the day, and the cost to ensure Turkish debt against default using credit-default swaps rose sharply.