The end of interest rate hikes: what comes next?

In the aftermath of the Covid-19 pandemic and the impact of the Russia-Ukraine conflict, we witnessed a period where all central banks, especially the large ones, implemented expansionary monetary policies to support the economies that suffered severe damage. Subsequently, as it became apparent that the rising inflation was not "transitory," central banks began implementing sharp interest rate hikes. However, concerns increased as the desired decrease in core inflation could not be achieved.

IS THE INTEREST RATE HIKE CYCLE ENDING?

At the beginning of the week, Bloomberg Economics published an important analysis on central banks. The analysis suggests that most global central banks have ended their interest rate hikes, and some are approaching the end of the interest rate hike process. Some are even preparing for interest rate cuts.

Bloomberg predicts that interest rates will be lowered in at least twenty out of the twenty-three regions it closely monitors by 2024.

The fundamental proposition of mainstream economics suggests that one of the most important monetary policy tools to combat rising inflation is the policy interest rate. Increasing policy rates is the response to rising inflation. That is, to bring inflation down to the desired level, the policy rate is first raised to the "necessary level" and then kept there for the "required period."

Of course, this "necessary level" and "required period" varies according to the dynamics of each country. Moreover, it can even vary for different periods within the same country. Furthermore, in some cases, the effectiveness of this policy is also a subject of debate.

So, what about inflation? In the case of two major economies such as the US and the EU, inflation is still not decreasing to the desired level. Although we can see a decrease in annual inflation, the influence of the base effect is also evident. Monthly price developments and the course of core inflation, in particular, indicate that inflation is not converging to the desired target.

With inflation stubbornly remaining high despite rapid and continued increases in policy interest rates, what will happen when the rate hike cycle comes to an end? It appears that even if rate hikes stop, interest rates may need to remain high for a longer period than initially anticipated. Only time will tell how effective this strategy will be.

The recent collapse of the 16th largest bank in the US, SVB, and Credit Suisse in Switzerland has raised concerns about the possibility of a global banking crisis. While authorities have indicated that the situation is under control, the continued risk has prompted major central banks such as the Fed to reassess their policies. For example, the Fed had initially planned to raise rates by 50 basis points but ultimately settled on 25, adopting a more dovish stance.

It seems that inflation and central banks will once again be among the most discussed topics in the upcoming period. Additionally, we may also question long-established central banking practices.