Previously published on October 10, 2022 in
By Milton Ezrati, Chief Economist at Vested
While inflation concerns have driven western central banks to raise interest rates, China is leading Asia in the opposite direction. All – east and west – worry over recession, but the Federal Reserve (Fed) the European Central Bank (ECB) and other western bankers has taken the lessons of the last great inflation of the 1970s and 1980s that it is worth the risk of recession to quell inflation as quickly as they dare. China’s central bank, the People’s Bank of China (PBOC), faces a very different set of pressures. Confronted by with much less intense inflationary pressure than the west and extremely concerned about the nation’s poor economic prospects, PBOC has cut interest rates, albeit only marginally, and otherwise eased monetary policy.
In the west, the Bank of Canada has taken the lead. Since March it has raised its target overnight lending rate five times for a total of three full percentage points. These rates are higher now than any time in the last 14 years. The Fed also has made a similar commitment. Since U.S. monetary policy makers finally awoke to the inflationary threat last spring, they have raised the target federal funds interest rate target some three percentage points to a level of 3-3.25%. The Fed’s open market committee (FOMC) is expected to raise rates still farther in coming months.
More recently, the ECB has joined in this trend. Reluctant to raise interest rates earlier in the year for fear of recession, European policy makers have at last acknowledged the need for monetary restraint, raising their target short-term interest rate some 0.75 percentage points. Although their target, at about 1.25% remains well below American rates. ECB policy makers have promised further hikes along these lines to catch up with their cousins in North America.