The Fed et al give a signal to relax, afraid of a severe recession?
Jakarta, CNBC Indonesia - The United States (US) central bank, known as the Federal Reserve (The Fed) announced another interest rate hike on Thursday (11/3/2022). The world's most powerful central bank raised interest rates by 75 basis points to 3.75% - 4%, in line with market expectations.
However, there are few signs that interest rate hikes may not be aggressive in the future.
The Fed stated that in determining future interest rate hikes, it will take into account how much interest rate increases have already been made, their effect on economic activity and inflation, as well as developments in economic and financial conditions.
This means that in the future if inflation starts to slow down, the Fed is likely to reduce its aggressiveness. But for the economy, Fed chairman Jerome Powell and colleagues will likely see how severe the downturn will be.
A quick way to reduce inflation is to bring the economy into a recession. During a recession, demand pull inflation will certainly decrease because people will reduce their spending.
This is what central banks in the world are currently doing, very aggressively raising interest rates, despite the recession at stake. Economic contraction will be better than prolonged high inflation.
When a recession occurs and inflation finally declines, monetary policy can be relaxed slowly to spur the economy back on. This will be easier to do than to deal with "ingrained" inflation.
However, there are indications that some central banks do not want to experience a deep recession due to high interest rates.
Canada's central bank (Bank of Canada / BoC) has clearly stated this.
The Fed and the BoC are the two most aggressive central banks in raising interest rates, judging by the size of the percentage increase.
To date, the BoC has recorded 6 increases, even last July by 100 basis points and September 75 basis points.
The last increase was made last Wednesday (11/26/2022) by 50 basis points. Interestingly, the BoC raised interest rates below market expectations by 75 basis points.
The BoC even said that the period of rising interest rates would soon end, because the economy is expected to stagnate in the next 3 quarters.
"The period of monetary tightening is almost over. We are close, but not there yet," BoC Governor Tiff Macklem told a news conference.
Maccklem said how high interest rates will depend on the impact given, how much monetary policy is able to reduce demand, how supply problems are resolved and inflation and inflation expectations respond to the policy.
"We expect interest rates to be raised again. That means it could be bigger than a normal increase, or it could be a normal 25 basis point increase," said Maccklem.
Prior to the BoC, Australia's central bank (Reserve Bank of Australia/RBA) had already surprised the market by raising interest rates 25 basis points last October, whereas previously it was expected to raise 50 basis points.
One of the things the RBA sees is an increase in lending rates that will weigh on Australians. In fact, many residents are expected to sell their houses due to the sharp increase in mortgage interest rates.
Based on data from RateCity, as quoted by the Guardian, every 100 basis point increase in interest rates will add AU$300 to mortgage payments with a 25-year tenor.
The RBA started raising interest rates since last May, until October it was recorded at 250 basis points. Based on RateCity's records, mortgage payments with a ceiling of AU$500,000 experienced an increase of AU$687.
This month, the RBA again raised interest rates by 25 basis points to 2.85%, as did the British central bank (Bank of England / BoE). BaoE also gave a signal that it will relax its interest rate hike.
https://www.cnbcindonesia.com/market/20221104073055-17-385081/the-fed-dkk-beri-sinyal-mengendur-takut-resesi-parah
However, there are few signs that interest rate hikes may not be aggressive in the future.
The Fed stated that in determining future interest rate hikes, it will take into account how much interest rate increases have already been made, their effect on economic activity and inflation, as well as developments in economic and financial conditions.
This means that in the future if inflation starts to slow down, the Fed is likely to reduce its aggressiveness. But for the economy, Fed chairman Jerome Powell and colleagues will likely see how severe the downturn will be.
A quick way to reduce inflation is to bring the economy into a recession. During a recession, demand pull inflation will certainly decrease because people will reduce their spending.
This is what central banks in the world are currently doing, very aggressively raising interest rates, despite the recession at stake. Economic contraction will be better than prolonged high inflation.
When a recession occurs and inflation finally declines, monetary policy can be relaxed slowly to spur the economy back on. This will be easier to do than to deal with "ingrained" inflation.
However, there are indications that some central banks do not want to experience a deep recession due to high interest rates.
Canada's central bank (Bank of Canada / BoC) has clearly stated this.
The Fed and the BoC are the two most aggressive central banks in raising interest rates, judging by the size of the percentage increase.
To date, the BoC has recorded 6 increases, even last July by 100 basis points and September 75 basis points.
The last increase was made last Wednesday (11/26/2022) by 50 basis points. Interestingly, the BoC raised interest rates below market expectations by 75 basis points.
The BoC even said that the period of rising interest rates would soon end, because the economy is expected to stagnate in the next 3 quarters.
"The period of monetary tightening is almost over. We are close, but not there yet," BoC Governor Tiff Macklem told a news conference.
Maccklem said how high interest rates will depend on the impact given, how much monetary policy is able to reduce demand, how supply problems are resolved and inflation and inflation expectations respond to the policy.
"We expect interest rates to be raised again. That means it could be bigger than a normal increase, or it could be a normal 25 basis point increase," said Maccklem.
Prior to the BoC, Australia's central bank (Reserve Bank of Australia/RBA) had already surprised the market by raising interest rates 25 basis points last October, whereas previously it was expected to raise 50 basis points.
One of the things the RBA sees is an increase in lending rates that will weigh on Australians. In fact, many residents are expected to sell their houses due to the sharp increase in mortgage interest rates.
Based on data from RateCity, as quoted by the Guardian, every 100 basis point increase in interest rates will add AU$300 to mortgage payments with a 25-year tenor.
The RBA started raising interest rates since last May, until October it was recorded at 250 basis points. Based on RateCity's records, mortgage payments with a ceiling of AU$500,000 experienced an increase of AU$687.
This month, the RBA again raised interest rates by 25 basis points to 2.85%, as did the British central bank (Bank of England / BoE). BaoE also gave a signal that it will relax its interest rate hike.
https://www.cnbcindonesia.com/market/20221104073055-17-385081/the-fed-dkk-beri-sinyal-mengendur-takut-resesi-parah
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