[The End of the 'Chip Money' Era] Domino Interest Rate Hikes... The Largest Tightening Since the 1990s Approaches

[Asia Economy New York=Special Correspondent Joselgina, Reporter Lee Hyunwoo] The era of ‘cheap money,’ when borrowing was easy and inexpensive, has come to an end. As the United States began raising interest rates in March, sparking expectations of the largest global tightening since the 1990s, central banks around the world have started to tighten the money supply they had previously flooded into the market.

According to Bloomberg and others on the 6th (local time), following the U.S. Federal Reserve’s indication of a rate hike in March, central banks worldwide are accelerating their tightening measures. After last week’s rate hikes by the UK, Czech Republic, and Brazil, Mexico (on the 10th) and Russia (on the 11th) are also expected to join the rate hike trend this week.

Russia, which raised its policy rate by 1.0 percentage point to 8.5% in December last year, is expected to implement additional rate hikes this month as inflation and the depreciation of the ruble continue. Mexico is also forecasted to raise rates by an additional 0.5 percentage point this month following its December increase.

Claes Knot, President of the Netherlands Central Bank and Executive Board member of the European Central Bank (ECB), has signaled an ECB rate hike in the fourth quarter of this year. President Knot stated, "Most European countries will suffer from inflation above 4% this year, and there is little that can be done to address this issue," adding, "I expect the ECB to begin raising rates by 0.25 percentage points as early as the fourth quarter." The ECB has consistently lowered or kept rates unchanged since 2011.

It is anticipated that the domino effect of tightening by major countries will accelerate further. Bloomberg forecasts that by April, countries accounting for half of the world’s gross domestic product (GDP) will join the rate hike movement. This would mark the largest scale of monetary tightening since the 1990s. Emerging market central banks such as those in Chile, Argentina, and South Africa have already begun raising rates since last year.

The reason central banks worldwide are tightening the money supply is due to inflation reaching its highest level in decades. To recover from the unprecedented COVID-19 pandemic shock, central banks had previously flooded money into the economy without considering overheating or inflation, but now they have drawn the sword.

U.S. consumer prices are at their highest level since 1982. The Consumer Price Index (CPI) for January, to be released on the 10th, is expected to show 7.3%, marking the second consecutive month above 7%. Inflationary pressures are mounting due to global supply bottlenecks combined with rising oil and raw material prices.

The British economic weekly The Economist reported, "The era of cheap money, borrowing at low interest rates, has come to an end," adding, "Now, governments, companies, and households worldwide are burdened with the debt and interest bombs that surged during the cheap money era." The global debt-to-GDP ratio soared from 230% in 2000 to 320% just before the pandemic and reached 353% in the first half of last year.

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