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Now each central bank seems to act on its own. They do not seem to consider inflation as a common enemy anymore, unlike what they did when inflation rose to ravage the global economy from second half of 2021, but now seen receding.  The United States Federal Reserve (the Fed), whose inflation target is 2% finally decided to pause its interest change on June 14, 2023. That marked the snapping up of a string of 10 consecutive rate hikes since July last year for 2022 for fighting “the country’s worst outbreak of inflation in 40 years”. The inflation rate was at its highest in US in April 2022 at 9.1%. Anti-inflationary measures thereafter eventually produced results. Inflation in US was cooling off with a clear downward trend from 6.4% in January 2023, 6.0% in Feb, 5.0% in March, 4.90% in April and 4.0% in May. June inflation data would be available around July.

The United Kingdom (UK), and the Eurozone, comprising 22 countries with a common currency have been facing persistent inflation, exceeding their target rate at 2%. Inflation in UK has been 8.70% for the past two months in 2023 (April and May). In the euro zone it was still above 6%, though showing somewhat a declining trend of 6.96% in April and 6.10% in May. While the Bank of England (BOE) raised the interest rate by 50 basis points to 5%, European Central Bank (ECB) effected a more moderate increase in its interest rate on June 15, to 4% in June, a 22-year high, from the May rate of 3.75%.  

India, an emerging economy has been experiencing a downward trend in its inflation beginning from the first month of 2023 (6.52% in Jan, 6.44% in Feb, 5.66% in March and 4.70% in April). The Reserve Bank of India (RBI) paused the interest rate change in April and continued its policy interest rate at 6.50%. As inflation came down to 4.25% in May, RBI again paused the interest rate change on June 8, for the second time, maintaining the rate at 6.50%.  

Since early 2022, central banks have been fighting inflation vigorously.  The US raised its policy interest rate to a maximum extent by 500 basis points (bps) from 0.25% to 5.25%, followed by Canada (425 bps), UK (475 bps), Australia (375 bps), Eurozone (400 bps), India (250 bps), and South Korea (250 bps). Amongst the world’s 147 central banks, 95 banks have maintained status quo, 43 have increased and 9 have decreased their policy interest rate. As inflation has decreased, though not in a uniform manner across the nations, we are now

witnessing emergence of departures from a common stand.   

Earlier periods witnessed common central bank action during two major crises which affected the world, sparing none. They were Great Recession (Dec 2007-June2009) and the Covid -19 pandemic (June 2020-June 2022).  Both brought in unemployment and misery. The Great Recession was due to universal decline in aggregate demand, due to sub-prime mortgage crisis and several bank failures and financial instability. The Covid-19 pandemic resulted in declines in aggregate supply and aggregate demand. Shut-downs of economic activities and livelihoods led to decline in aggregate supply and loss of jobs and steep fall in household income led to decline in aggregate demand. The world embarked on formulating and implementing expansionary fiscal and monetary policies. 

Expansionary monetary policies required the lowering of borrowing costs by reducing interest rates to near zero, and pumping in liquidity by buying bad debts of failing banks, The so called quantitative easing amounted almost to

throwing money from a helicopter. In fact, the US Fed Chair, Ben Bernanke earned the epithet “Helicopter Ben”. Although in the final months of receding recession the US Fed announced tapering the easy money policy and returning to normalization, delays in carrying out the promised “tapering” quantitative easing measures compounded the misery. That also gave rise to a “new term” in economic lexicon: “taper tantrum”. The liquidity in monetary system of the US was enormous.

When the world returned to a period of some normalcy,

the Covid-19 pandemic intervened. which marked the return of excess liquidity as well. That resulted in inflation mounting from mid 2021. The Russian-Ukraine shooting war, beginning from February 2022 destroyed supply

chains, causing shortages of food grains and fuel.  Central banks had to raise their policy interest rates to fight inflation in the midst of stagnating growth due to supply of inputs, including fuel and fuel. 

With pausing the rate change on June 14 by the Fed and India for the second time, the two central banks have again started warning against inflation risks, lurking around the corner. The phase of monetary tightening is not yet over. The central banks of  US and India are busy with keeping “the powder ready, but keeping faith” in the falling downward trend in inflation, Their targets are 2% (the US Fed’s target) and 4% (RBI’s target). The latter is allowed with an allowable margin of 2%, creating a so-called comfortable zone up to 6%. 

The latest official pronouncements (semi-annual testimony by the Fed Chair to the US Congress in the last week of June and RBI Governor’s Press Statement after MPC decision in early June are not optimistic about the future rates.  In his semi-annual testimony to the US Congress last month, Jerome Powel, the Fed Chair told the US House Financial Services Committee: “The process of getting inflation down to 2% has a long way to go” drawing attention to inflationary risks arising from geopolitical tensions and stubborn inflation in Europe. He called the resultant inflation as “stickier inflation”, another addition to the economic dictionary. 

The RBI Governor pointed out to inflationary risks from failure of monsoon and the likely adverse impact of El Nino on domestic agriculture and expected shooting up of food prices and the familiar risks arising from hiking of oil

price by OPEC as recession clouds were clearing away, as reflected in strong employment figures and growth in wages in advanced economies.

In India, RBI has projected the annual retail inflation at 5.10% in FY 2024, which is higher than the inflation recorded in May 4.25%. Professors Jayanth Varma and Ashima Goyal, two non-official members of RBI’s Monetary Policy Committee (MPC), recorded their dissenting notes. Although in the end the decision was unanimous to pause the rate change for the second time, the two professors have been voicing their critical views in public. 

Prof Ashima Goyal feels a real REPO rate, the difference between REPO rate and expected inflation (6.50%-5.10% = 1.4%) is too high given the global slowdown. In the absence of any signs of excess aggregate demand, a real repo rate of 1%, is adequate to bring inflation to RBI’s target

of 4%. Professor Goyal also suggests no need to further withdraw accommodation, if inflation forecasts fall

sustainably below 5%. 

Professor Jayanth Varma is of the view that the current real REPO rate at a close 1.5% is “high enough to cause demand destruction, which may damage growth”. He wants a neutral stance be adopted rather than withdrawal of accommodation. He says the Oil Producing and Exporting Countries

plus others (OPEC+) would prefer cuts in crude production rather than increases in crude price; and further, the fears about droughts and weak agricultural performance may not materialize as Indian farmers have shown their resilience capability to overcome hurdles inflicted by failure of monsoon and droughts in the past. 

It looks RBI may not cut the rate any further. The Fed may raise the rate higher in the remaining months of the calendar year. The RBI Governor already indicated in April, when the decision was taken for the first time to pause rate change, that 6.50% is not the pivot. It may get much higher.   The “powder” is not the use of interest rate. It also includes liquidity management tools for absorbing excess money in the system. They are (i) variable rate reverse repo auctions; (ii) sale of government bonds; (iii)increase in cash reserve ratio; (iv) market stabilization scheme (MSS); and (v) foreign exchange swaps. 

So, with decreasing inflation, one set of nations is worried about recovery and return to normalcy, more importantly growth. Even among them, there are some nations which seem to have conquered inflation, are still worried about return of inflation. The other set of nations are still fighting inflation. 

Remember the French saying: “plus ça change, plus c’est la même chose”? 

In English, it is: “the more things change, the more they stay the same.”