Global central banks of late are raising their interest rates one after another. It is their response to arrest galloping inflation, which in the end will reduce the purchasing power of consumers and dampen economic growth—or worse lead to recession.
The US Federal Reserve has just hiked its borrowing costs by half a point, the biggest since 2000 and larger than the normal quarter-of-a-point increase. The US central bank is aiming to reduce the nation’s inflation rate, which hit 8.5 percent in March this year, the fastest pace since 1981.
Several factors are contributing to higher inflation in the US and the rest of the world. A re-opened economy has sent consumers spending faster than they did during the height of the pandemic when there were little business activities. The Russian invasion of Ukraine has sent global oil prices above $100 per barrel and restricted the supply of wheat and corn, both major commodity exports of the warring nations.
The strict lockdown in China’s major cities is contributing to higher prices. The no-COVID policy of China has shut down its industrial factories, resulting in the disruption of the global supply link.
Other commodities are also in short supply. India’s central announced a surprise rate hike ahead of the US Fed, also because of rising inflation brought about by the war in Ukraine. The spike in crude prices and now the shortages of edible oils in Europe caused by the Ukraine war are pushing India’s inflation and food prices higher. Indonesia compounded the supply problem when the major producer ordered a complete ban on palm oil exports last week.
The interest rates in the Philippines will soon follow the trajectory paths of the US Fed and other central banks. Aside from curbing spending by inducing consumers to save, higher interest rates will make the US dollar more attractive. Capital flight can ensue if the Philippine peso offers lower yields than the greenback.
The inflation rate in the Philippines, meanwhile, is similarly surging, climbing 4.9 percent in April from 4 percent in March. The inflation in the Philippines is not as severe as the 8.5 percent in the US and nearly 7 percent in India. But rising food, transport and utility prices will soon prompt the Bangko Sentral ng Pilipinas to rein in the inflation rate through higher interest rates. Allowing the inflation rate to surge for a longer time will just erode the value of one’s hard earned money.
