Macroscope | Despite the Ukraine crisis, global interest rate rearmament looks like a done deal
- The UK and Canadian central banks have already raised rates, and the US Federal Reserve seems set to press ahead as early as next week
- China must follow the Fed’s lead on rates or accept the consequences of a much weaker renminbi exchange rate
With so many uncertainties bearing down on the global economy, you’d hardly guess that central banks would be adding to the gloom with the prospect of higher interest rates. But global interest rate rearmament seems like a done deal with the US Federal Reserve set to press ahead with higher rates from as early as next week’s Federal Open Markets Committee meeting.
The Fed is set to wage war on the growing threat of much higher inflation becoming embedded, raising the risk that US interest rates could go higher than generally expected. With headline US inflation currently running at a 40-year high of 7.5 per cent, the Fed will show little mercy in its quest to stop a damaging wage-price spiral emerging.
The days of easy money and near-zero interest rates are over in the US, and the rest of the world will have to go along or pay the penalty of exchange rate weakness against a resurgent US dollar. The dollar is being bid higher by a flood of safe haven flows on the back of the Ukraine crisis, and rising interest rate expectations will simply give more encouragement to dollar currency bulls.
In the longer term, price stability is the Fed’s overriding goal. It can ill-afford to turn its back on the inflationary forces that are building up right now.