Some Central Banks Continue To Hike Rates In Face Of Turmoil

Four central banks in the past two weeks have stuck to their game plans, ignoring credit market turmoil and hiking interest rates to offset inflation pressures rising from strong economic growth.

The South African Reserve Bank Thursday raised its key interest rate to 10.00% from 9.5%. That followed the Norwegian central bank's decision to raise its key interest rate to 4.75% from 4.5% Wednesday. And last week, the Reserve Bank of Australia stuck to its plan by hiking rates, while the Bank of Korea also tightened monetary policy in a move that came as a surprise to financial markets. That sequence suggests that central bankers remain predisposed to focus on what they believe to be a positive medium-term outlook on their economies and inflation. The policy takes the view that declining share prices and a squeeze on the credit markets are temporary and unlikely to have a big impact on the real economy. If the European Central Bank takes the same view, it will raise interest rates to 4.25% from 4.0% on September 6. The ECB clearly flagged that move in its last public comment on the rate outlook on August 2. The Bank of Japan and the Bank of England are less firmly committed to hiking rates within a specific time frame. But they likely also would be in line to raise interest rates if their primary focus remains on the economy and inflation. However, like the U.S. Federal Reserve, the bigger central banks may be more conscious of their role in assuring the stability of the global financial system, and what impact they have on broader market sentiment. "None of these are major global players," Julian Jessop, an economist at Capital Economics, said of the central banks that went ahead of hike rates recently. The SARB highlighted inflation risks associated with food and oil prices and a high rate of household consumption in explaining its decision. "At this stage there is no evidence that the recent turbulence in the international financial markets will have marked effects on the domestic growth outlook," the SARB's Monetary Policy Committee said. That reasoning echoed comments made by the Norges Bank Wednesday, when it said that while recent credit and stock market turbulence has generated uncertainty concerning future economic developments, that didn't "warrant a departure from the monetary policy strategy presented in June." "The Norges Bank's decision to not 'depart from strategy despite market turbulence' in our view provides an apt description of the main central banks' reaction function at present," said Matthew Sharratt, an economist at Bank of America. The sensitivity of the U.S. economy to developments in the credit markets, and the degree to which the performance of the U.S. economy affects the outlook for the global economy are uncertainties that were stressed by both the Norges Bank and the SARB. The latter's MPC said the outlook for the domestic economy and inlfation "will depend to some extent on the impact of these developments on the U.S. growth performance." The Norges Bank noted growth is strong in China and India and there is an upturn in Europe. "Growth in the international economy may be less dependent than earlier on demand for goods and services in the U.S.," it said. So far, U.S. policy makers don't believe the turmoil in credit markets is likely to have a big impact on economic growth. "It's premature to say that this upset in the market is changing the course of the economy in any fundamental way," St. Louis Federal Reserve President William Poole said Wednesday.