Economic pressures are forcing most central banks to tighten their currencies—but China has the opposite problem and is loosening interest rates.
- On July 27, the European Central Bank hiked rates 25 basis points to 3.75%, cumulatively increasing rates by 425 points in 12 months.
- The Federal Reserve also hiked rates by 25 basis points to a new borrowing rate range of 5.25% to 5.5%.
- On July 28, Japan’s central bank declined to hike rates, and stands as one of the few major world banks doing so, but hinted that rate hikes were a possibility.
- On August 3, the Bank of England hiked rates 25 basis points to 5.25% to a 14-year high.
- On August 14, Argentina’s central bank hiked key interest rates by 21 percentage points to 118%.
- On August 15, Russia’s central bank raised rates to 12%, as the ruble lowered to its lowest value in years of one cent due to the ongoing war.
- Also Tuesday, the Bank of China announced one-year loan rates would decrease from 2.65% to 2.5%, while seven-day loans would decrease from 1.9% to 1.8%.
Why It’s Important
There is no central factor that is driving different countries to make these decisions, but the long-term effects of COVID-19 and the policies of the pandemic years have spiked inflation over the past two years across the world, with different countries being hit with different effects of severity.
While America only saw a modest inflation increase from 3% to 3.2% in July due to base effects from last year, India’s retail inflation rose more drastically to 7.44% last month due to increased food prices. Other countries are tightening their rates amid highly chaotic environments. Argentina’s intense hike comes amid chaos caused by populist libertarian Javier Milei winning a primary victory after promising to eliminate central banking.
China’s economy is facing the opposite problems—with limited economic stimulation, poor growth, deflating consumer prices, and high youth unemployment. Inflation is the least of China’s worries, as the consumer price index was reported in the negative last month. Among Tuesday’s announcements, the Chinese government has made the decision to stop publishing the youth joblessness data, which it claims is due to college students not looking for jobs while studying.
The Bank of China’s rate decreases for the world’s second-largest economy are a bid to spur increased borrowing and economic growth.