A new study by the “Economist” that examined what happened to inflation in countries that were ahead of most of the world in raising interest rates reveals – diligence did not necessarily pay off.
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Unlike the Bank of Israel, which waited to raise interest rates until the American Fed began to act on the issue about six months ago, eight central banks from around the globe began to tighten the economy more than a year ago to curb price increases. For example, in July 2021, while interest rate makers in the US and Europe were still ignoring the risk of an inflationary crisis, the Central Bank of Chile voted unanimously to raise the interest rate from 0.5% to 0.75%. Since then, the bank has repeatedly raised the interest rate up to to 11.25%. What actually happened? In September, the annual inflation in Chile was about 14%. The core inflation rate accelerated to 11%.
Many critics claim that if it weren’t for the Fed, the European Central Bank and others waiting to raise interest rates during 2021, the world would not be struggling with inflation today. The experience of Chile, and other countries that tightened early and aggressively, casts doubt on this argument.
Contraction alongside inflation
The group of countries examined by the Economist includes Brazil, Hungary, New Zealand, Norway, South Korea, Peru and Poland. The unusual group was named Hikelandia (“Hikelandia”). In the 12 months to October 2022, the median economy in Hiklandia raised interest rates by about 6%. Even if the Fed raises interest rates by 0.75 in early November, the cumulative increase in US interest rates over the past year will still not be close to that of Hiklandia.
As expected, the tightening of the monetary screws slowed down the economy of Iceland. The housing sector declined rapidly as mortgage rates rose. House prices are falling in New Zealand. South Korea’s housing boom is over.
Using data from the Goldman Sachs bank, it was found that the Hiklandia economy is weakening compared to the global average. Inflation, on the other hand, remains stubborn: in September, core inflation (without volatile indicators such as energy and food) in the Hiklandia economy stood at 9.5%, an increase of 3.5% compared to March. Worse, the gap between it and global core inflation appears to be widening.
from optimism to pessimism
Hiklandia’s difficulties raise three possible conclusions: First, at the moment it is simply unrealistic to expect a decrease in inflation. A second possibility is that policymakers, including those in Iceland, have not been brave enough—perhaps central banks should have raised interest rates more aggressively.
The third possibility is the most worrying: it may be more difficult to stop inflation than could have been predicted a year ago. A report published this summer by the Bank for International Settlements, which includes central banks from around the world, hinted at such a possibility.