This year has seen the world’s central banks strike a hawkish tone, delivering unprecedented interest rate hikes amid the war in Ukraine, rising fuel and food prices, and runaway inflation. The ‘cost-of-living crisis’ has become a household term and central banks argue they must hike interest rates to keep up pace with inflation and bring it down to target range. Will the move help to lower inflation or are banks overreacting and moving too quickly, failing to wait and see if their rate hikes have the desired effect?
South African financial publication Business Day writes SA Reserve Bank governor Lesetja Kganyago is correct in his assessment that the SA inflation rate should be just 3% and has endorsed his proposal that the country undergoes major fiscal reform and undo the mistakes made in the past where inflation was largely ignored.
The publication points to the late former president of Zimbabwe Robert Mugabe as a worst-case scenario of what can happen when an economy is mismanaged and inflation is ignored.
The same scenario could be playing out in Turkey where President Recep Erdogan has argued that central banks could achieve slower inflation by decreasing interest rates. Meanwhile, Turkey’s inflation is sitting well above 80% with the lira having lost a third of its value against the US dollar in 2022.
The case for raising interest rates is the natural response from central banks when they seek to tame inflation as has happened in the United Kingdom and Europe, and Banque de France governor François Villeroy de Galhau has said the European Central Bank should continue to raise interest rates so that the eurozone can get back to the neutral level by the end of 2022.
Over in the United States, economists are mixed as to whether the Federal Reserve should continue with its extremely hawkish position and aggressive rate hiking. In its Wednesday newsletter, the New York Times outlined the cases for caution in raising interest rates and a continued increase at the current pace while also explaining the delicate balancing act that the Fed has to strike.
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