Central Banks Hike Interest Rates in Sync to Tame Inflation Pressures

IMF Blog, August 10, 2022

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Canonical URL: Central Banks Hike Interest Rates in Sync to Tame Inflation Pressures

Authors: Tobias Adrian, Fabio Natalucci
Date: August 10, 2022
Context: During the pandemic, central banks in both advanced and emerging market economies implemented interest-rate cuts and asset purchases to ease financial conditions and support the economic recovery.
Current situation: With inflation at multi-decade highs in many countries and pressures broadening beyond food and energy prices, policymakers have pivoted toward tighter policy.

Emerging market central banks proactively started to hike rates earlier last year; advanced-economy counterparts followed in the final months of 2021.
The monetary policy cycle is increasingly synchronized globally.
The pace of tightening is accelerating in several countries, particularly in advanced economies, in terms of both frequency and magnitude of rate hikes.
Some central banks have begun to reduce the size of their balance sheets, moving further toward normalization of policy.

Stable prices are described as a crucial prerequisite for sustained economic growth.
With risks to the inflation outlook tilted to the upside, central banks must continue normalizing to prevent inflationary pressures from becoming entrenched.
Monetary policy cannot resolve remaining pandemic-related bottlenecks in global supply chains and disruptions in commodities markets due to the war in Ukraine.
Monetary policy can slow overall demand to address demand-related inflationary pressures; thus, tightening of financial conditions is the goal.

Central banks need to act resolutely to bring inflation back to their target, avoiding a de-anchoring of inflation expectations that would damage credibility built over the past decades.
Clear communication by central banks about the need to further tighten policy and steps required to control inflation is crucial to preserve credibility.
Clear communication is also critical to avoid a sharp, disorderly tightening of financial conditions that could interact with, and amplify, existing financial vulnerabilities.

High uncertainty in the economic and inflation outlook hampers the ability of central banks to provide simple guidance about the future path of policy.
A sharp, disorderly tightening of financial conditions could put economic growth and financial stability at risk down the road by amplifying existing financial vulnerabilities.

Source: Tobias Adrian, Fabio Natalucci, August 10, 2022.