Major economies from the US to China to Japan have been growing at different rates this year, as monetary policies and economic growth begin to diverge in the post-COVID-19 era.
This contrasts with last year, when developed economies converged in their willingness to aggressively raise interest rates to prevent inflation from running wild, despite the threat of cooling economic growth.
However, there appears to be a widening divergence in central banks’ resolve to overtighten this year, as some are reconsidering the rate hike cycle’s effects on economic growth and employment, while others remain on the lookout for rising inflation.
The division reflects the material differences in economic outcomes across borders and also shows that global central banks’ synchronized interest rate hikes have come to an end.
Taiwan’s central bank maintained its discount rate at 1.875 percent following its quarterly board meeting on Thursday last week, which was in line with market expectations. The pause marks a shift in the bank’s monetary policy after five consecutive rate hikes totaling 75 basis points since March last year.
The move came hours after the US Federal Reserve kept the target range of its Fed funds rate unchanged at 5 to 5.25 percent. It was the first pause in the US central bank’s current rate hike cycle after having raised rates by 500 basis points in 10 policy-setting meetings since March last year.
However, later on Thursday, the European Central Bank raised its three key interest rates by 25 basis points, bringing them to the highest levels in two decades, while signaling more rate increases ahead.
Despite mixed actions by the Fed and the European Central Bank, the Bank of Japan unsurprisingly kept its ultra-low interest rates unchanged on Friday in a move that underlines the bank’s long-term policy of trying to nurture sustainable and stable inflation.
Meanwhile, the central banks of Australia and Canada raised their policy rates by 25 basis points at their monetary policy meetings on June 6 and June 7 respectively, as inflation remained sticky.
However, the People’s Bank of China cut its medium-term lending facility rate — the interest for one-year loans to financial institutions — by 10 basis points to 2.65 percent on Thursday following a 10 basis-point reduction in the key seven-day reverse repo rate to 1.9 percent on Tuesday, after fresh data showed China’s post-COVID-19 recovery was running out of steam.
By absolute value, the magnitude of global interest rate hikes since last year is lower than what it was before the 2008-2009 global financial crisis, but the pace of rate hikes in the past one-and-a-half years has been faster than expected, as monetary policymakers tried to make up for their inflation misjudgement.
The market’s focus has turned to economic growth and whether central banks are prepared to eventually halt rate hikes, or even start to cut rates.
For Taiwan’s central bank, weaker-than-expected GDP data and moderating inflationary pressure are likely to discourage policymakers from implementing further rate hikes by the end of this year, or even in the first half of next year. This could be the beginning of an extended rate pause period, as the likelihood of rate cuts is extremely low in the near term, considering the outlook for inflation in the service sector, which has risen due to increased demand following the end of most COVID-19 restrictions, labor shortages and rising labor costs.
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