While the financial world waits for the Federal Reserve to start reversing its ultra-loose policy stance, recent moves by a clutch of other central banks signal the days of pandemic-era accommodation are already numbered even as COVID-19 continues to impede smooth economic recoveries around the world.
South Korea’s central bank on Thursday raised its benchmark interest rate by a quarter of a percentage point to blunt rising financial stability risks posed by a surge in household debt, becoming the first major monetary authority in Asia to do so since the coronavirus broadsided the global economy 18 months ago.
Even before the rate hike in South Korea, though, central banks in Latin America and eastern and central Europe had begun lifting interest rates this year to beat back inflation that is building on the back of currency fluctuations, global supply chain bottlenecks and regional labor shortages.
And larger-economy central banks also are getting into the swing. The Bank of Canada has already cut back on its bond purchases and could proceed to raise borrowing costs in 2022, and the Reserve Bank of New Zealand (RBNZ) is expected to lift rates by the end of this year despite balking at an expected hike last week in the face of a snap COVID-19 lockdown.
For its part, the Fed is lumbering toward tapering its $120 billion in monthly asset purchases, with an announcement expected before the end of 2021, possibly as early as next month. An actual US interest rate increase is likely a year or more away, however.
Fed Chair Jerome Powell is set to speak later on Friday on the economic outlook at the US central bank’s annual Jackson Hole summer research conference, which is being held virtually for the second year in a row. His remarks may color expectations at the margin for when the Fed makes its move but are not likely to offer any concrete signal.
When Powell spoke at last year’s conference – unveiling a new policy framework that is just starting to be tested – fewer than half of the 22 million US jobs lost to coronavirus shutdowns in the spring of 2020 had been recovered and inflation was running at half the Fed’s 2 percent target rate. The outlook outside the United States was no less bleak, with lockdowns still widespread.
The situation in the United States and other economies could hardly be more different a year later.
The US economy has more than fully recouped all of its lost output roughly 9 million more jobs have been regained and inflation is well above target. Elsewhere, most of the world’s economies are back squarely in growth mode, albeit unevenly so in many cases as COVID-19 outbreaks fueled by the highly contagious Delta variant trigger localized lockdowns.
In South Korea, the economy grew 5.9 percent on a year-over-year basis in the second quarter, the fastest pace in a decade, and young people are bingeing on debt and kindling financial stability concerns at the Bank of Korea. The export-reliant Asian nation’s key factory sector expanded in July for a 10th straight month, even as the Delta variant crimped manufacturing output for rivals like China, Vietnam and Malaysia.
