The Reserve Bank of New Zealand (RBNZ) has become the first central bank in the world’s advanced economies to raise its benchmark interest rate in 31 months.
The last year central banks in developed markets raised policy rates was in 2011 when the global economy seemed to recovering from the 2007-2009 financial crises, boosted by extraordinary easy monetary policy and government stimulus.
A monetary tightening cycle got under way in mid-2010 when the Bank of Israel (BOI), Norway’s Norges Bank, Sweden’s Riksbank and the RBNZ raised rates in the second half of that year.
The BOI continued the tightening cycle in 2011, raising its rate in January, followed by the Riksbank in February, the European Central Bank (ECB), Denmark’s Nationalbank and the Riksbank in April.
Norway then raised rates in May and July, with the Riksbank and the ECB finishing off the monetary tightening cycle in developed economies in July 2011, 31 months prior to the RBNZ’s 25 basis point rate rise today.
But the global economy had already run out of steam by mid-2011, hit by a cascade of negative events, ranging from the Japanese tsunami, political and social unrest in the Middle East, Europe’s sovereign debt crises and political indecision in the United States.
Central banks quickly reversed course, with the BOI again leading the charge by cutting its rate in September 2011, followed by the Reserve Bank of Australia (RBA), the ECB and Denmark in November, and then Norges Bank and the Riksbank in December.
Since July 2011, only central banks in emerging and frontier markets, along with central banks in smaller economies, have raised rates, most often in response to inflationary pressures but also more recently to cushion currencies from depreciation that raises import prices and thus inflation.
Meanwhile, central banks in advanced economies have undertaken waves of stimulus, ranging from the U.S. Federal Reserve and Bank of England’s (BOE) asset purchases, aggressive easing by the Bank of Japan (BOJ) and rate cuts by the ECB.
But this period of extraordinary stimulus is coming to an end, with the Fed starting to reduce its asset purchases from January and the BOE expected to raise rates in early 2015.