The case for rate hikes is heading into contested territory



The battle of inflation is the most desirable real estate in global monetary policy. Most central banking titans insist that rapid price increases are the scourge of the moment, going so far as to view recession as an acceptable price to pay for victory. A parade of Federal Reserve officials in recent days has sought to underscore that message – although a recession is not their forecast.

Could this dominant line have serious competition? The stated willingness to tolerate slowdown, if not outright engineering, hasn’t really been tested. The time may not be too far off. Brazil doubts the wisdom of many more hikes after 12 consecutive hikes. A respected think tank in London says the UK economy is already in recession. In South Korea, India, Malaysia and Thailand, traders are betting growth worries will crowd out inflation anxiety, though that hasn’t been reflected in official statements.

At least one authority could begin, very slowly, to hedge after a late start to tightening followed by rapid interest rate hikes. Along with a commitment required to bring inflation under control, the Reserve Bank of Australia this week stressed the importance of “keeping the economy in balance”. The new wording was accompanied by a worrying reduction in growth forecasts and a rise in inflation estimates.

The RBA, which raised its benchmark rate by half a percentage point on Tuesday, is not done withdrawing its accommodations. Borrowing costs are still below the bank’s neutral estimate, a hard-to-pinpoint area where metrics neither help nor hinder the economy. But the wording seems designed to push back against the idea that Governor Philip Lowe will blithely let the expansion die. “Keeping inflation in check may not be the RBA’s sole objective,” Andrew Ticehurst, strategist at Nomura, wrote in a note.

The path, the bank conceded, is narrow. The wording isn’t exactly a bombshell at home or away – policymakers have said much the same thing verbally from time to time – but including it in the statement elevates its stature. Every word of central bank statements is reworked, including those that are omitted.

Expect a few more qualifications in the fight against inflation.

New Zealand is a good place to look. The Reserve Bank of New Zealand stepped in early and got tough, pushing rates higher as the Fed, RBA, Bank of England and European Central Bank wrung their hands to end a quantitative easing. Today, unemployment is starting to rise, but in parallel with rising wages. Kiwi home prices are falling and business and consumer confidence is declining. That’s not to say the RBNZ will balk at a fourth 50 basis point hike this month, but it does warrant a less lopsided discussion. The bank is expected to cut rates in 2023, a year earlier than its own projections allow, according to Capital Economics. The firm thinks that the RBA will go in the same direction.

South Korea’s housing market, one of the frothiest in the world during the pandemic’s easy money era, also appears fragile. The industry faces a deep correction as rates climb, according to a Bank of Korea study released this week. This is to be expected; the central bank had long been worried about an overheated real estate market. It also underscores that the tightening campaign is not without cost. July’s 50bps step could be a one-time thing.

Some caution will naturally enter the rate dialogue as more central banks shift to neutral. The competitive race with bigger and bigger rides will soon die down. It’s not the same as saying their job is done; no one walked away from the case for higher rates. Increases will become more modest. Accommodating pivot? Not exactly. Just listen to Neel Kashkari, long called the Federal Open Market Committee’s super-dove, who said Wednesday that he was “laser focused” on inflation.

Not so long ago, Lowe was shaping up to be the only governor in the RBA’s six-decade history not to raise interest rates. That’s when hikes came to years; the bank at one point predicted 2024 as the year of take-off. Politics can change, and quickly too. Hikes are in 2022 flavor. The ground will be more contested next year, especially if faltering activity is able to make inflation less fragrant.

More from Bloomberg Opinion:

• Let’s not mince words as the economy heads south: Daniel Moss

• European bond yields settle for less than 3-2-1: Marcus Ashworth

• Wishful thinking won’t help the Fed defeat inflation: Bill Dudley

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously, he was Bloomberg News’ economics editor.

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