2023: From record rate hikes to clamour of cuts, a jittery year for central bankers

“The job of the central bank is to worry,” is the most relevant statement made by Alice Rivlin, vice chair of the Federal Reserve Board in the 1990s. Rivlin’s statement's fundamental premise was the central bank's most important concern, which is to tame the intractable inflation, and to keep it in check.  Well, 2023 will go down in the history of central banking as the year of ups and downs, year of being chastised for overdoing things, finally a year which kept the central banks across the globe on tenterhooks, jittery, and vigilant. And technically, the year 2023 can be broadly divided into two phases. First phase, when all central banks across the world swung to action to tame the red-hot soaring inflation by unleashing the most aggressive rate hike cycle in history, without plunging into recession. Second half, when the interest rate peaked, inflation was largely under control, and the pressure of rut cut followed next. 

“2022 was the year of acknowledgement for the central bankers across the world, and also was the year of biting the bullet. As far as 2023 is concerned, it is a continuation of what started in the second half of 2022,” Vivek Kumar, Economist, Quant Eco, told Republic Business. 

First Half: Aggressive Central Bankers
“In the US and Europe, they suffered inflation for the last three years, initially they thought inflation was transitory and would go away.  Powell in fact said that inflation is transitory, and they are looking through it.  In both Europe and US calculations went wrong, inflation has been more persistent than they believed,” Duvvuri Subbarao, former RBI governor, told Republic Business.  

It was in late 2022, when all central banks proactively grappled with soaring inflation and efforts continued in 2023 as well. The US Fed, the most powerful central bank in the world, had raised the policy rate by a full 5 percentage points in 11 meetings since March 2022. Before treading the aggressive rate hike cycle, the policy interest rate stood at 0-0.25 per cent. The hikes have been carried out to control inflation which surged to four-decade high levels post pandemic. Apart from the US Fed, the European Central Bank behaved similarly to combat sharp surge in prices and has lifted rates by a combined 4.5 percentage points since July 2022. Bank of England’s interest rate rose to a 15-year high of 5.25 per cent, following 14 consecutive rate hikes. 

Similarly, the Reserve Bank of India after freezing the repo rate throughout the Covid-19 pandemic at 4 per cent (April-2020 to April 2022), raised it for the first time in May 2022 to 4.4 per cent in response to rising inflation. Since then, the Central bank has hiked the rate intermittently by 210 basis points in total to 6.50 per cent. 

Second Half: Higher for Longer
After two years of unprecedented global policy tightening, the call for rate cut has started picking up steam in the second half or at the fag end of the year.  US Fed policy interest rate stands at a 22-year high of 5.0-5.25 per cent now, after wading through 11 rate rises in the most aggressive rate-raising cycle in 40 years. In fact, the RBI in its latest and the last monetary policy meeting of 2023 clarified that keeping inflation under control is the priority of the apex bank. The RBI governor in its post meet press conference said that RBI will not wait for the house to catch fire first and then act.  
 

“We are keeping track of inflation which is our biggest concern as of now, some data sets over the months on inflation should not instill a sense of complacency in us,” RBI governor said. Powell, the US Fed chair, also warned earlier this month it would be “premature to conclude with confidence” that the world’s most powerful central bank had achieved a sufficiently restrictive stance to tame inflation. “We are prepared to tighten policy further if it becomes appropriate to do so,” he said. 

“In the US interest rates have peaked and the central banks have given many signals that they may not be done yet. In fact, the Fed chair has said that they cannot say it with confidence that inflation is complete. My own reading is that central banks are not done yet, they are waiting and watching from the experience of the last three years, I don’t think it’s a done deal,” Subbarao added.  Similarly, Bank of England Governor Andrew Bailey said, “We will need to keep interest rates high enough for long enough to ensure that we get the job done.” The statements of central bankers, be it US Fed, India’s RBI or UK’s BoE have clearly stated their "higher for longer" mantra, which is now the official stance of the US Federal Reserve, European Central Bank and the Bank of England.

“After a dip in oil prices in the beginning, oil prices started to correct one year after the Russia-Ukraine war and there were concerns about shadow banking and bank failure in the US. There was expectation that monetary policy would pivot sooner by the end of this year, but those expectations have been pushed back, the central banks came out and gave those push backs with respect to interest rates staying higher for longer,” Kumar of Quant Eco said. 

While the battle against inflation is still on, what remains to be seen is how 2024 pans out for the central bankers, inflation, and macro fundamentals.