HOT TOPIC: Navigating Global Interest Rate Hikes
Interest rate hikes are making headlines across the globe, from Turkey's surprising reversal of unorthodox policies to the US Federal Reserve's consecutive rate increases and the Bank of England's unexpected move. These developments reflect the efforts of central banks to address inflation and stabilize their respective currencies.
Turkey's Bold Move
The head of Turkey's central bank, Hafize Gaye Erkan, was only recruited from the US this month in the wake of Mr Erdogan's re-election as president. Her decision marks the first rise in interest rates since December 2020, after a turbulent period in which three central bank governors were fired in less than two years, as they sought to stick to orthodox economics.
Turkey has hiked its main interest rate from 8.5% to 15%, reversing one of President Recep Tayyip Erdogan's unorthodox economic policies. The 6.5% rise, marked a major shift in policy by his new economic team brought in to tackle rampant inflation. Turkey's leader has until now insisted on keeping interest rates down. Inflation is almost 40% and Turks are in the grip of a cost-of-living crisis.
Although the increase almost doubles Turkey's policy rate, it is far less than many had forecast. In its statement, the bank's monetary policy committee made clear that Thursday's move was the start of a gradual process, with the target of bringing inflation down to 5%. In the past five years, the Turkish currency has lost more than 80% of its value and foreign investment has plummeted.
Turkish Interest Rate v Inflation
*Source: Turkstat & TCMB
US, a rapid pace
The Federal Reserve in the US has been steadily raising interest rates since March 2022, with 10 consecutive rate hikes. This pace of increases, not witnessed since the 1980s, reflects the urgency to address inflation. The hikes have varied, with increases of 0.75% during the peak of inflation and 0.25% in recent months. The current interest rate at 5%, is the highest since the pre-2008 financial crisis.
UK surprised markets
The Bank of England (BoE) surprised markets by raising interest rates by half a percentage point, exceeding expectations. The decision came in response to significant news suggesting that British inflation would persist longer than anticipated. The BoE's Monetary Policy Committee (MPC) voted 7-2 to raise the main interest rate to 5%, the highest since 2008. This rate increase represents the largest seen since February and aligns with other central banks' actions, including the European Central Bank and central banks in Sweden and Norway.
Good news on the local front
South Africa's repo rate has increased by 125 basis points so far in 2023. Currently, at 8.25%, it is now at a 14-year high. The South African Reserve Bank has hiked rates by 4.75% since the tightening cycle began in November 2021. The good news is South Africa’s consumer price inflation (CPI) slowed faster than expected in May, headline inflation came in at 6.3%, below market expectations of about 6.5%. So, inflation is easing quicker than expected, and we are closer to the South African Reserve Bank’s 3-6% target range. Investec chief economist, Annabel Bishop said that Investec’s baseline is that the Reserve Bank will hold rates when it meets next month, and will probably keep it steady until it starts cutting at the end of the year or early next year.
Conclusion
Interest rate hikes are taking center stage in most countries as central banks respond to economic challenges, taking a proactive approach to combat inflation and maintain economic stability.