Interest-Rate Pauses: Are They in Trouble?

Interest-rate pauses are not exactly in trouble, but things are beginning to look awkward for officials eyeing a decent break. This article discusses how the global economy shows more grit than expected and how central banks struggle to catch a break.

The Global Economy and Interest Rates

World growth isn’t falling off a cliff, and inflation has failed to ease up quite as expected in some big economies. The more grit the expansion shows, the greater the risk of a policy mistake. While the resilience of the US economy may get a lot of attention, the situation in Asia bears scrutiny.

Rate hikes have already been suspended in South Korea, Indonesia, and Malaysia. However, the cuts in borrowing costs considered a natural sequel will take longer to materialize. Almost daily warnings from Federal Reserve policymakers that rates may need to move higher than anticipated aren’t welcome.

All central banks assert they move independently from the Fed. However, they tend to replicate broad trends in American credit. This year was supposed to bring respite after the rapid tightening of 2022. That’s still likely to happen, but the picture has become messier.

The Situation in Australia and Indonesia

The Reserve Bank of Australia will probably nudge its main rate by another quarter point Tuesday. This doesn’t sound so bad, except there was a case to be made that the RBA should be done by now. Worse, the panel issued a surprisingly hawkish statement. As a result, economists scrambled to add further hikes to their projections.

If the RBA risks overdoing it, Bank Indonesia might be asked whether it has done too little. Governor Perry Warjiyo, recently nominated for a second term, says he’s done with hikes and that price gains are projected to return to a comfortable level.

The Future of Interest Rates

While monetary chiefs are generally reluctant to box themselves in with categorical statements, Indonesia’s pause is “credible.” But, on the other hand, we also believe rate cuts won’t come very rapidly next year either.

With its rebound coming nicely, additional monetary easing in China looks like a long shot. The economy may have the opposite problem to the one it faced last year when the expansion faltered: A recovery that’s a bit too vigorous.

Related Facts

• South Korea, Indonesia, and Malaysia have all suspended rate hikes
• The Reserve Bank of Australia has issued a surprisingly hawkish statement
• Bank Indonesia might be asked whether it has done too little
• Additional monetary easing in China looks like a long shot

Key Takeaway

Even a small increase in interest rates can lead to a significant amount of economic volatility. As a result, central banks have to tread lightly and be mindful of balancing economic growth with inflation.

Conclusion

Interest-rate pauses aren’t in trouble, but the global economy’s resilience makes it difficult for central banks to catch a break. With rate hikes already suspended in several countries, further cuts in borrowing costs might take longer to materialize. The situation in Asia bears scrutiny, and central banks must be mindful of balancing economic growth and inflation.