New Delhi: A red hot inflation in the United States, the world’s largest economy, has put immense pressure on the US Federal Reserve to raise policy rates, forcing other central banks in India, Europe, Canada and other countries to hike their interest rates in sync with US policy rates.
US consumer price inflation data is slated to be released next week but before that the comments by US Fed Reserve chairman Jerome Powell in a Senate committee hearing has highlighted the hawkish tone adopted by the Central Bank as it battles to fight runaway inflation in the world’s largest economy.
As per the latest data, the consumer prices paid by US consumers registered an increase of half a percent in January this year, while the price increase over the last 12 months has been 6.4 per cent. While price increase in the food items was over 10 per cent, the price increase of energy products was close to 9 per cent. It has put immense pressure on the US Federal Reserve to increase the policy rates from near zero a year ago to close to 5 per cent in less than a year.
Inflation, Job data to determine Fed rate hike
The US Fed carried out this unprecedented hike to bring down the inflation in the country to close to 2 per cent. Comments by US Fed Chairman Jerome Powell indicate that the US Central Bank may carry out another 50 basis point hike in the policy rates in the Bank’s meeting scheduled for later this month.
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Though the US Central Bank will factor in the two crucial data sets to be released there this month – inflation data to be released on March 14 and employment data for February would be released later today (March 10). Subsequent to the release of these two crucial economic data sets in the USA, the Federal Open Market Committee, which is similar to India’s Monetary Policy Committee meeting chaired by the Reserve Bank Governor, will hold its meeting on March 21 and 22 and announce its decision on the policy rates in the US.
RBI follows path of coordinated rate hikes
The Reserve Bank of India (RBI) has so far followed a coordinated approach to hike the rates in sync with the policy rate increases announced in the US, though the quantum of increase has varied as per the Indian requirements of supporting a slowing economic growth.
Under the Section 45ZA of the Reserve Bank of India Act of 1934, RBI is under legal obligation to keep the retail inflation under the target set by the Central Government, which has been fixed at 4 per cent with the margin of 2 percent on either side.
While the US Federal Reserve has raised the policy rates in the US from near zero to close to 5 percent in less than a year, the Reserve Bank of India has increased the repo rate, the rate at which banks borrow short-term money, by 250 basis points since May last year.
As a result, the interest rates for individual borrowers who borrow loans for purchasing houses, vehicles or to meet other personal needs and loans taken by businesses such as money borrowed by them to meet working capital requirements have gone up in the last one year and they are expected to remain at an elevated level in foreseeable future.
