Advanced Countries Signal Tightening One After Another... Norway's First Interest Rate Hike Since COVID-19

Norway Signals Additional Rate Hike in December... UK Also Leaves Room for Increase Within the Year
US Expected to Announce Tapering in November... ECB Cautious About Premature Tightening Shift

Oystein Olsen, Governor of the Central Bank of Norway
[Photo by Reuters Yonhap News]

[Asia Economy reporters Byunghee Park and Suhwan Kim] Major emerging countries such as Brazil, Russia, and Mexico have raised their benchmark interest rates since the first half of this year, and the shift to tightening is spreading to major Western advanced countries. This is due to rising energy prices and increasing inflationary pressures caused by ongoing supply chain disruptions. On the 23rd, Norway implemented its first benchmark interest rate hike since the COVID-19 pandemic, and there are forecasts that the UK may raise its benchmark interest rate within the year if necessary. In contrast, the European Central Bank (ECB) is still maintaining a cautious stance.

According to Bloomberg News on the 23rd (local time), the Central Bank of Norway decided at its monetary policy meeting to raise the benchmark interest rate from 0% to 0.25%. Bloomberg reported that the Norwegian krone is one of the world's top 10 traded currencies and that Norway is the first major country to raise its benchmark interest rate. Furthermore, Norway's rate hike is seen as a turning point in the global monetary policy shift due to economic recovery and rising prices.

The Central Bank of Norway stated in a press release that the expected timing of the rate hike has moved slightly earlier than June, and there is a high possibility of an additional increase in December.

The UK is also likely to raise its benchmark interest rate soon. According to the minutes of the Bank of England's (BOE) monetary policy meeting released that day, monetary policy committee members agreed that future tightening measures should involve raising the benchmark interest rate. They also shared the view that if tightening is necessary even before the end of quantitative easing this year, raising the benchmark interest rate could be appropriate. Among the nine monetary policy committee members, two argued for advancing the end of quantitative easing.

Senior economist Liz Martins of HSBC Holdings explained, "The BOE has left open the possibility of raising the benchmark interest rate within the year," adding, "This means they do not rule out early tightening if inflationary pressures increase." Economist Alan Muns of JPMorgan Chase also assessed, "The minutes were more hawkish than expected," and "This opens the door to rate hikes in November or December, which was previously considered unlikely."

Andrew Bailey, Governor of the Bank of England
Photo by Reuters Yonhap News

The BOE's inflation target is 2%, but current forecasts suggest that the year-end inflation rate will exceed 4%. An inflation rate in the 4% range surpasses the BOE's August projections. The BOE's next monetary policy meeting is scheduled for November 4.

On the other hand, the ECB is cautious about premature tightening. Currently, the ECB is implementing a bond purchase program worth 1.85 trillion euros (approximately 2,550 trillion won) as a stimulus measure for economic recovery during the COVID-19 pandemic. Some ECB members are concerned that ending the bond purchase program could cause a sudden and significant shock to the real economy, known as the 'cliff effect.'

Medis M?ller, ECB Governing Council member and Governor of the Bank of Estonia, warned in an interview with Bloomberg News, "The end of the quantitative easing program carries the risk of a cliff effect, especially for highly indebted countries."

Bloomberg News diagnosed, "While central banks of major countries such as the US and UK are raising alarms about inflation, the ECB, which continues large-scale quantitative easing policies, is becoming increasingly isolated." Neville Hill, chief economist at Credit Suisse, predicted, "The ECB will enter the tightening phase later than the Fed and BOE."

Meanwhile, the US central bank, the Federal Reserve (Fed), also announced after its monetary policy meeting the day before that it will soon begin tapering (reducing asset purchases). Fed Chair Jerome Powell said, "It is appropriate to announce tapering in November and complete it by mid-next year."