The Geography of the Global Interest Rate Cycle

There is much concern about how quickly the Fed and other major central banks will raise interest rates as the Covid pandemic fades. But the global interest cycle has in fact already turned, with central banks in several countries having already raised interest rates, in some cases repeatedly.

The BIS publishes data on monetary policy rates for a sample of 38 countries that can be used to monitor monetary policy developments across the world.¹ Computing the median of a group of 34 economies (see below), a measure of the global interest rate cycle can be constructed (Figure 1). It shows that following the onset of the pandemic in early 2020, central banks cut interest rates from a median of 1.875% in March, April and May, when the median policy rate was reduced to 0.5%.

However, the figure also shows that the lift-off for monetary policy rates occurred in July 2021, and that rates by now are at 1.75%, that is, almost back at the pre-Covid level.

1. Median Global Policy Rate

Source: EFG calculations on BIS data, data as of 14 February 2022.

It is interesting to look at the geographic dimension of these interest rate movements. Computing the median policy rate for five different regions, it is apparent how different these have been. The regions are defined as follows: 

• Asia, using data for China, India, Indonesia, Japan, Malaysia, the Philippines, South Korea, and Thailand.
• Latin America, using data for Argentina, Brazil, Chile, Colombia, Mexico, and Peru. 
• Eastern Europe: using data for Croatia, Czech Republic, Hungary, North Macedonia, Poland, Romania, Russia, Serbia and Turkey. 
• Western Europe: using data for Denmark, the eurozone, Iceland, Norway, Sweden, and Switzerland.
• English-speaking countries: Australia, Canada, New Zealand, the UK, and the US. 

Grouping the English-speaking countries together may seem odd since they are spread across the world. However economic linkages between these countries are close. Moreover, except for the Fed, they are all operating monetary policy with an explicit inflation targeting strategy. Figure 2 below shows the median policy rate for each group of countries since the beginning of the covid pandemic until December 2021. The reason for using the median is that it is not unduly affected by the policy choices of any single central bank.

Figure 2. Median policy rate, by geographic region

Source: EFG calculations on BIS data, data as of 14 February 2022.

The chart shows that the median policy rate has evolved in different ways across these five groups of central banks.

For instance, Latin America has had the highest median policy rate since 2020, and rates started to rise there from March 2021 onwards. The Central Bank of Brazil increased rates from 2% to 2.75% in that month; Mexico followed in June (raising rates from 4% to 4.25%); Chile in July (from 0.5% to 0.75%); and Peru in August (from 0.25% to 0.5%). Interest rates have also risen, but by less, in the group of Eastern European countries. While the median rate increased for the first time in July 2021, the Central Bank of Russia started to raise rates in March (from 4.25% to 4.5%). In June the Czech central bank raised rates from 0.25% to 0.5% and the Central Bank of Hungary from 0.6% to 0.9%, as did the central banks of Poland (from 0.1% to 0.5%) and Romania (1.25% to 1.5%) in October.

The median interest rate has not risen in the Asian or in the Western European groups of central banks. However, the Bank of Korea started raising interest rates in August (from 0.5% to 0.75%), the Central Bank of Iceland raised rates (from 0.75% to 1% in May) and the Bank of Norway followed in September (from 0% to 0.25%).

The median interest rate rose in the group of English-speaking central banks in December 2021 when the Bank of England raised rates (from 0.1% to 0.25%). However, the Reserve Bank of New Zealand had raised rates as early as October 2021 (from 0.25% to 0.5%). While there is much focus on whether the Fed will start a process of interest rate increases at its policy meetings in March, the global interest rate cycle has already turned in Latin America and Eastern Europe, and just started among the central banks in English-speaking countries. Only in Asia and Western Europe is there little sign that rates are on their way up.

¹ See http://go.pardot.com/e/931253/atistics-cbpol-htm-m-6-382-679/fd7c/30518362?h=9v9HI5TPXE5KaB2vB0joXIUQo9u9c3_xKk7LJtZvXNk which also contains information about the exact policy rates used.