Rapid inflation is forcing central banks to keep their monetary policy on a tight leash

Just when interest rates appeared to have peaked, major central banks around the world embarked on a period of monetary tightening, suggesting that a decisive victory over inflation was still a long way off.

The Reserve Bank of India kept interest rates unchanged for the second straight day but made it clear that the fight against inflation is far from over.

However, the Bank of England and Norway’s central bank recently hiked interest rates, while the European Central Bank has signaled further rate hikes. In Turkey, the central bank hiked interest rates sharply to curb skyrocketing inflation, causing the local currency to falter.

Both the British and Norwegian central banks took decisive action on Thursday, raising interest rates by half a percentage point, signaling an acceleration of their tightening measures. This followed the European Central Bank’s recent decision to raise borrowing costs by a further quarter of a point and suggested another rate hike in July is likely.

Turkey’s central bank carried out a massive 6.5 percentage point hike on Thursday, raising the benchmark one-week repo rate to 15 percent from 8.5 percent after inflation hit 40 percent in May. After that, the Turkish lira saw a sharp decline of over 5 percent.

Investor confidence in the US has deteriorated again as the US Federal Reserve has hinted at further rate hikes for the remainder of 2023. Two-year Treasury yields hit a three-month high after Federal Reserve Chair Jerome Powell reiterated the need for more rate hikes this year.

In Europe, concerns about the economic outlook led to an inversion of the German yield curve. In the US, jobless claims remained high, indicating a slight slowdown in the labor market. In addition, high mortgage rates limited demand for condominiums.

In India, the latest RBI minutes revealed a cautious mood. Interest Rates Committee Member Jayanth R. Varma expressed concern that current monetary policy is approaching levels that could potentially cause significant damage to the economy.

The RBI decided to leave the benchmark short-term lending rate unchanged for the second straight review. However, minutes of the meeting showed differing opinions among members of the six-member Monetary Policy Committee (MPC) on the future direction of rate hikes. Analysts are concerned about factors such as the delayed monsoon and higher prices for key vegetables like tomatoes. The MPC has advised that it is premature to move into a cycle of rate cuts at this point.

China’s central bank, meanwhile, took action and cut two interest rates to boost economic growth. However, the magnitude of the rate cut was less than expected, disappointing investors. China’s recovery from pandemic-related lockdowns and supply chain disruptions has been slower than expected, requiring action to address the situation.

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