Major central banks continued to hike interest rates at a steady pace in May, although the extent of tightening moderated as concerns about economic growth and persistent inflation led policymakers to adopt a more cautious approach.
In May, all six of these banks overseeing heavily traded currencies among the G10 countries raised rates. The European Central Bank, the Bank of England, and the Federal Reserve increased their benchmark rates by 25 basis points each, joined by central banks in Australia, New Zealand, and Norway. This cumulative increase amounted to 150 basis points, compared to two hikes across five meetings in April. In September of the previous year, during the peak of the tightening cycle, eight central banks collectively raised rates by 550 basis points.
Jean Boivin, head of the BlackRock Investment Institute, noted that despite weakening growth, inflation has remained persistent. This has led markets to reassess their expectations for policy rate cuts, as it becomes evident that central banks are unlikely to reduce rates this year and may continue with further hikes.
So far this year, G10 central banks have implemented 21 rate hikes, resulting in a total tightening of 725 basis points. In comparison, there were 54 rate hikes throughout 2022, amounting to 2,700 basis points.
In emerging markets, the rate hike cycle has progressed further, although some central banks have shifted towards easing measures. Out of 18 central banks in the Reuters sample of developing economies, 15 convened meetings to determine rate decisions. However, only Israel, South Africa, Thailand, and Malaysia increased rates, totaling a 125 basis point increase. In April, there were 11 meetings where two central banks raised rates by a combined 50 basis points.
Hungary became the first European nation to loosen its policy, reducing its emergency one-day deposit rate by 100 basis points to 17% in May. This rate adjustment was implemented to stabilize the country’s depreciating currency and is not reflected in the Reuters sample.
Looking ahead, the path may not be entirely smooth. S&P Global Ratings stated in a recent report that emerging markets have generally passed their inflation peaks, supported by declining energy prices and favorable base effects. However, food inflation has remained more persistent than anticipated, as evidenced by the UN world food price index, which rose in April for the first time in a year. S&P expects emerging markets to achieve their respective central bank inflation targets by the end of 2024.