The positives in central banks’ breaking steps
It was a small step for the Bank of Japan, but a giant leap for global monetary policy. On 18 March, the Japanese central bank lifted its policy rate from negative to a range of 0–0.1%. In less than a week, the Swiss National Bank cut its benchmark rate by 25 basis points. With that, the post-covid era of synchronized monetary tightening was effectively over. In its place, central banks are carving their independent trajectories tailored to their respective national conditions.
Rate calls are split along three lines. The “no rush to cut” camp includes the US Federal Reserve, European Central Bank, Bank of England, and the Reserve Bank of India: They have paused interest rate hikes, and are waiting for earlier hikes to work through the system before switching to cuts. A few countries, notably Switzerland and Brazil, have already started the rate easing cycle. And fewer still are hiking rates.
The splintering of interest rate decisions suddenly seems unusual. That’s because the world had become used to a unified central bank response in recent years. During the pandemic, most countries cut interest rates and provided fiscal support. This was swiftly reversed when a wave of global inflation sparked by the Ukraine war required steep rate hikes in 2022 and 2023. A similar round of coordinated easing had occurred in 2008 in response to the global financial crisis. But a quick look at past data reveals that synchronized monetary policy is the exception rather than the norm.
Central banks are taking their own independent trajectories in 2024 Domestic Drivers Synchronized rate cycles usually occur in response to global crises
AS INFLATION retreats from the highs of 2022, countryspecific dynamics of growth and inflation will drive interest rate decisions. No central bank wants to cut too quickly and risk an inflation rebound, and all of them realize the importance of lower rates in reviving growth back to pre-pandemic levels. Yet trade-offs differ across economies. For example, in Switzerland, inflation is below 2%, external demand is weakening and the Swiss franc has appreciated—all of which made a strong case to start cutting interest rates. On the other hand, the Bank of Japan raised rates in the belief that recently concluded wage hike agreements would end decades of deflation. Among emerging economies, Vietnam has been cutting rates since April 2023, and Brazil since August 2023, both with the aim of spurring growth. Mexico started easing only last month. India has opted to hold rates steady until inflation is sustainably within its tolerance limits.
Global growth after a crisis gets shaped by emerging markets Compounded Tightening Growth Divergence
NON-SYNCHRONOUS monetary cycles lead to diverging growth. This was seen after the 2008 global financial crisis. Following a coordinated global monetary and fiscal easing, emerging economies, led by China, recovered quickly, while growth in advanced economies remained sluggish. As a result, the US and Europe were forced to keep rates low for much longer than most developing nations.This decoupling between advanced and emerging economies led to a “two-speed recovery” in 2010 and 2011. China’s resource-intensive growth was key to stimulating output in commodity exporters such as Brazil and Australia; India and Indonesia were booming, and even sub-Saharan Africa bounced back to pre-crisis growth. A similar cycle could start now. Post-pandemic recovery in emerging economies has been slow, and China is not the powerhouse it used to be. But fast-growing emerging economies can collectively give momentum to world growth.
FOR AN emerging economy, synchronized rate tightening elsewhere creates three kinds of risks. First, rising US rates weaken the rupee and feeds inflation via costlier imports and dollar borrowing. Second, domestic financial markets become more volatile as international capital shifts back to advanced countries. Third, higher rates raise global slowdown risks, which imperils India’s export growth. In response, emerging economies such as India are forced to respond by tightening financial conditions more than they would otherwise.
Had synchronized policies continued, India would also have faced those risks—worse than in the last phase of synchronized rate hikes in 2004–2007, when India was less plugged into the world economy through trade and financial flows and was thus insulated. That’s why a return to rate divergence is good news: It restores some independence to our monetary policy.
The author is an independent writer in economics and finance.