Where do we go now?

A year or two after the debilitating global financial crisis (GFC) of 2008/09 many central banks started to lift rates again. However, they did not get very far. Not only did they have to reverse the rate hikes; they had to take rates down to much lower levels and even conduct quantitative easing (QE) once rates reached zero.

If we fast forward to today, there seem to be some developed-county central banks that are lining up rate hikes very soon, barely sixteen months after the depths of the pandemic-inspired global economic collapse. Are they jumping the gun again, just like the post GFC period, or will rate hikes not just stick but show that the upcoming tightening cycle will be far faster this time around?

Expectations for rate hikes continue to drift in from some of the bigger central banks like the Fed and BoE. What central banks won’t want to do is to make the same mistake many did after the GFC and hike rates too quickly, as did Norges Bank of Norway and the Reserve Bank of New Zealand. Both had to subsequently unwind the rate hikes in pretty quick order – and then to take policy rates down to even lower levels than during the GFC. Most notably, the ECB fell into the same trap with its two hikes in 2011, eventually falling foul of the euro zone debt crisis. Is it possible that central banks that hike rates soon will have to unwind them again quickly? It is possible, but we think unlikely.

For a start, the GFC caused not only a deep recession but was followed by a real struggle to recover for most countries. In contrast, the pandemic recession has been more of a quick-down-then-up affair for GDP and there are signs that the lingering legacy effects won’t hold economies back as the financial crisis did more than a decade ago. Another important point is that the fiscal landscape now is very different to the post financial crisis period.


Turkey’s Central Bank (CBRT) left interest rates on hold at 19% and, with inflation likely to remain elevated over the coming months and the economy having bounced back quickly from May’s lockdown, an easing cycle is unlikely to commence until the tail end of 2021. The decision to leave policy settings unchanged was expected by all analysts, including ourselves, polled by Reuters ahead of the meeting. President Erdogan last week repeated his calls for interest rate cuts but the jump in inflation from 17.5% y/y in June to 19.0% y/y in July had made any move by the central bank to fulfil the president’s desire highly unlikely. Equally, to two decimal places, July’s inflation reading came in at 18.95%, which enabled Mr. Kavcioglu to stick to his commitment to keep the policy rate above inflation without having to tighten policy. The MPC is also likely to have taken comfort from the fact that core price pressures appear to be easing. Inflation is likely to remain elevated at 18.0-19.0% over the next few months. Our forecast is for the one-week repo rate to end this year at 17% and to be lowered to 12% by end-2022.

-Jason Tuvey, economist, Capital Economics, August 12

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