Rising Prices and Imminent US Tapering... Global Tightening Accelerates

New Zealand, Poland, and Iceland Simultaneously Raise Benchmark Interest Rates on the 6th

Katr?n Jakobsd?ttir, Prime Minister of Iceland.
Photo by Yonhap News

[Asia Economy Reporter Byunghee Park] The global pace of monetary policy tightening is accelerating. This is due to rising energy prices such as crude oil, natural gas, and coal, which have prolonged the high inflation situation beyond expectations, as well as the imminent tapering (asset purchase reduction) by the United States, the key currency country.

According to Bloomberg on the 6th (local time), three countries?New Zealand, Poland, and Iceland?raised their benchmark interest rates in a single day. New Zealand and Poland raised their benchmark interest rates for the first time in 7 and 9 years respectively, while Iceland decided on its third rate hike this year.

The Reserve Bank of New Zealand raised the benchmark interest rate from 0.25% to 0.5% at its monetary policy meeting that day. This was because the inflation rate in the second quarter reached 3.3%, exceeding the central bank’s monetary policy target range of 1-3%. This is New Zealand’s first interest rate hike since March 2014.

The New Zealand government decided to gradually ease lockdown measures starting from the 5th. The Reserve Bank of New Zealand explained the background of the rate hike by stating that a rapid economic recovery is occurring as soon as the quarantine measures in Auckland, the largest city, were eased. The Reserve Bank expects inflation to eventually stabilize at the midpoint of the monetary policy target, around 2%, but anticipates it could rise to the 4% range in the short term.

The National Bank of Poland also raised its benchmark interest rate from 0.1% to 0.5% that day. Bloomberg reported that unlike New Zealand, Poland’s rate hike was an unexpected decision. This rate hike decision is expected to spark political controversy in the future.

Adam Glapinski, Governor of the National Bank of Poland, said just a day before the monetary policy meeting that the 0.1% benchmark interest rate could be maintained until 2023. He argued that the recent surge in inflation was temporary and due to energy price hikes beyond the central bank’s control.

However, three of Glapinski’s predecessors expressed a different view in an open letter this week, stating that delaying the rate hike further would pose a threat to the economy. Crucially, Prime Minister Mateusz Morawiecki, just hours before the monetary policy meeting, said he expected appropriate measures from the central bank to stabilize inflation, which had surged to its highest level in 20 years, influencing the central bank’s sudden rate hike.

Poland’s sudden rate hike can be interpreted as a clear reflection of the current global economic disorder. With COVID-19 still a factor of economic uncertainty, inflation has surged, increasing the difficulty of monetary policy management and intensifying controversy over interest rate hikes.

Iceland also raised its benchmark interest rate from 1.25% to 1.5%. Iceland’s benchmark rate was 0.75% at the beginning of the year but has now doubled. The Central Bank of Iceland shifted its monetary policy stance to tightening in May and has raised the benchmark rate three times by 0.25 percentage points each. Iceland’s consumer price inflation reached 4.6% in April, the highest in 8 years, then eased to 4.4% in September. However, the central bank explained the additional rate hikes by citing persistently high inflation expectations. In particular, it expressed concern about the nearly 15% rise in housing prices.

This content was produced with the assistance of AI translation services.