Inflation and interest rate expectations… In addition to the Fed, international central banks are also very active. Rising inflation rates led the US Federal Reserve to raise interest rates for the first time since 2018 and the Bank of England to raise rates at its third consecutive meeting. Expecting higher inflationary pressure amid permanently rising prices in energy and broader commodity markets suggests that the tightening trend of Central banks may remain valid. A greater uncertainty will be the resilience of economic growth to the headwinds of these higher borrowing costs, a widespread cost of living crisis, geopolitical stress from the occupation of Ukraine, and financial market volatility.

 

BOE, G-10 perspective, choosing the Fed's path… The Bank of England (BoE) preferred to raise interest rates by another 25 basis points and to reduce the main policy rate to 0.75%. While the decision to raise interest rates was largely expected, the accompanying statement from the BoE was interpreted as relatively dovish as policy makers did not seem determined to raise rates any further. The UK central bank is likely to raise interest rates another 25 basis points at its next meeting in May; however, after May, the path of monetary policy after this week's meeting is less certain. The BoE's less hawkish tone suggests that policymakers in the UK may be more concerned about growth prospects rather than high inflation. Financial markets are still pricing in for the policy rate to rise by around 150 basis points in the next 12 months.

 

On the other hand, the Bank of Japan (BOJ) kept interest rates stable and curbed growth despite inflation. Two factors are changing Japan's growth and inflation dynamics: the Russia-Ukraine war and the extended virus restrictions. Japan's economy is likely contracting due to virus restrictions introduced in January and extended through March, covering an area that accounted for 90% of GDP at its peak. Cost inflation caused by a supply shock is counterproductive for reflation in the absence of stronger wage growth. Therefore, even if the core indicator temporarily reaches 2% in April 2022, we may doubt that the BOJ will move.

 

Global Central banks policy rates, meeting dates, interest rate projections, Taylor rule interest thresholds… Source: Bloomberg

 

Emerging markets… The Central Bank of Brazil (BCB) was among the most hawkish in emerging markets. BCB policymakers chose to raise the Selic policy rate by 100 basis points to 11.75%. It also pledged to raise interest rates another 100 basis points at the next meeting in May.

 

The Central Bank of Russia had doubled interest rates in an urgent effort. Last week, it was on hold. A rise in inflation has already begun, and there is little that monetary policy can do to contain it. Due to sanctions, Russia cannot access its foreign exchange reserves in US dollars and other currencies. Without access to hard curreny, the likelihood of Russia defaulting has also increased. Up to this point, credit rating agencies have downgraded Russia's sovereign credit rating to reflect the high probability of default.

 

Turkey's central bank did not change the benchmark interest rate for the third month, despite Fed tightening and a renewed increase in the inflation test. Inflation is at 54.4% due to the weak lira and jump in energy costs, and developments since Russia's invasion of Ukraine seem to increase inflation even more. Adjusted for inflation, Turkey's borrowing costs are already at minus 40.4%, the lowest of its peers. We think that market conditions will be harsh enough to lead the central bank to a tighter monetary policy. We do not find the current rates sustainable in an environment where global financial risks are increasing.

 

Conclusion? It seems that many Central banks intend to implement a moderate amount of further monetary tightening in the coming months. It should also be noted that the outlook is unusually uncertain due to higher energy prices and tighter financial market conditions, which are putting headwinds on the economy. In the new crisis environment, which will deeply affect the growth dynamics of many countries, the data-dependent image shows that we will see evaluations from different perspectives. Countries such as Turkey, which is not data dependent and tries to act focused on its economic perspective, and China, which wants to revive growth rates and activate the credit mechanism, are out of this tightening cycle.

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