Major central banks in developed and emerging markets around the world raised interest rates by nearly 1,200 basis points in July alone, intensifying their fight against a decade of high inflation, and Canada surprised markets with the excessive move.
Last month, central banks that control five of the 10 most traded currencies raised rates by 325 basis points. Thus, the total rate increase since the beginning of the year in the G10 central banks amounted to 1,100 basis points.
However, the July total was lower than the 350 basis points reported by the seven central banks in June.
“We have reached the peak of central bank war-mongering,” Christian Kopf, head of bond portfolio management at Union Investment, told Reuters.
“Central banks have made it clear that they will not go overboard with rate hikes,” Kopf said, adding that this was also the message from U.S. Federal Reserve Chairman Jerome Powell.
July was dotted with several attractive movements. Canada has been the main hawk to shock markets, delivering the first 100 basis point rate hike among the world’s advanced economies in the current cycle, raising its key rate to 1.5%.
New Zealand raised its interest rate for the sixth straight time and signaled it was satisfied with the planned aggressive rate of tightening to curb soaring inflation.
And, of course, the most important thing: the Fed raised the interest rate for the second time in a row by 75 basis points, reaffirming its commitment to contain inflation at the highest level in 40 years.
There has been no respite for policymakers in emerging markets, where inflation has been falling for much longer than in advanced economies.
Nine of the 18 central banks raised rates by 850 basis points in July. Overall, emerging market central banks have raised interest rates by 5,265 basis points since the start of the year, nearly double the 2,745 basis points for all of 2021, according to estimates.
“Emerging market central banks remain more concerned about inflation than growth,” BofA’s David Hauner said in a recent note to clients.
Hungary made two rate changes in July, raising the benchmark rate by 300 basis points to 10.75%, the first time since late 2008 that borrowing costs were in double digits – and signaling further hikes.
Colombia and Chile rose 150 basis points and 75 basis points respectively, although emerging market superhawk Brazil, which had already raised rates to 13.25 basis points in June, took a break.
However, emerging markets also saw a contraction, with Russia cutting interest rates to 20% following its February 24 invasion of Ukraine, which triggered widespread sanctions.
Inflationary pressures will remain a headache for policymakers, said Tobias Adrian, director of the Monetary Policy and Capital Markets Department at the International Monetary Fund (IMF).
“The magnitude of the jump in inflation came as a surprise to central banks and markets, and there remains considerable uncertainty about the outlook for inflation,” Adrian wrote in a blog post on Monday.
“Inflation risks appear to be significantly to the upside,” Adrian said, adding that there was a significant risk that price pressures were entrenched and expectations were not met.