Central bank decision: Raise interest rates against inflation?

It’s Central Bank Week. Yesterday the US Federal Reserve – today five other central banks commented on interest rate policy. The challenge is the same everywhere: How do you get inflation under control?

A full percentage point in Sweden, half a percentage point in Great Britain, and a quarter percentage point in Norway: central banks are tightening interest rates almost everywhere these days. Most of them have one goal: fight high inflation. But the larger the rate hike, the higher the risk that economic growth will be dampened. People then consume less, and companies are reluctant to invest because loans become more expensive.

The head of the US Federal Reserve, Jerome Powell, knows the problems. He wishes there was a painless way, he says, but there isn’t. Fighting inflation is a balancing act in most countries.

Different countries, different causes

The special thing about it: The reasons for the rising prices are not the same everywhere. Here in Germany, it is the high energy prices that are driving up inflation. Americans have very different concerns: Oil and gas are so plentiful that they could cover their needs with their own resources.

Their problem is the high demand for products and services. The need is so great, which is why prices are rising, explains chief economist Michael Heise from HQ Trust. “This means that increases in interest rates by the central bank have a greater impact on inflation and can slow down the rate of inflation much more quickly than is possibly the case here in Europe,” said Heise.

However, there is no magic formula against high inflation rates – the starting point in each country is too different. But there is another reason why many central banks are now reacting with high interest rate hikes, says Chris-Oliver Schickentanz, chief investment strategist at Capitell: “I think the central banks have hesitated and procrastinated for too long overall, and as a result they now have to get inflation under control to actually act very, very decisively.”

High interest rates: here to stay?

The situation is complicated and the simultaneous tightening of monetary policy is also provoking new problems, the World Bank warns. She fears that the world is heading towards a global recession and a series of financial crises in emerging and developing countries.

For central banks, it remains a weighing process – and a game for time, says chief economist Ulrich Kater from Deka-Bank. “And that’s why patience is needed when fighting inflation, it takes a year or two,” says Kater. And: “It means that these interest rates, which have now come back, will and must remain.”

Because inflation does not go away immediately at the touch of a button. In Europe, the key interest rate is currently 1.25 percent, in Great Britain it will be 2.25 percent in the future, and in the USA it will be up to 3.25 percent. The picture is different in Switzerland: Here the National Bank ended years of negative interest rates today. The key interest rate there is 0.5 percent. However, the inflation rate is also significantly lower than in Germany.