If the US raises central bank (CB) rates this year, it looks like it would be the only major economy to do so. So far in 2016, major economies are either lowering rates, or leaving them steady. The ECB, for instance, hasn’t changed rates yet in 2016. But, that’s because they are at all time lows of 0%. Other European countries, such as Sweeden, Denmark and Switzerland, have been experimenting with a so-called Negative Interest Rates Policy (NIRP).
So, who is raising rates? Looking at the list of rate changes in the first 5 months of 2016, the two largest countries to of raised rates are Argentina and Denmark.
Argentina. According to the IMF, at less than 1/30th the size of US GDP, Argentina is ranked 21 in the world for GDP in 2015. But, not only is the largest economy to raise rates this year relatively small, it is raising rates to combat hyperinflation after years of printing their currency, a result of years of political corruption of populist leaders printing to meet campaign promises. So, it should not surprise anyone that they raised rates from 35.43% to 36.9%. On the plus side, this is lower than their all-time high of 1390%. I also heard from a resident of Argentina that they recently elected a leader who is restoring a free market to Argentina, and trying to reign in the craziness that lead to constant depreciation of their peso. That friend cautioned, however, that it will take years for the reforms to take hold and restore this economy. I was a bit more optimistic about the pace until I saw that they had to raise rates again.
Denmark. At half the size of Argentina, the IMF ranks them in 36th place for GDP. If you believe that central bank depository interest charges are “negative interest rates”, then they kicked off the year by raising their CB rate from -0.75% to -0.65%. Many don’t expect another increase until next year, and don’t expect to see positive rates until at least 2018.
The two largest economies to raise rates so far this year are, in fact both relatively small compared to the US, EU, China and Japan. And, clearly, they are both in extreme situations, one fighting hyperinflation, the other fighting deflation. Neither move is an ordinary increase designed to cool off an overheating economy to smooth out the business cycle, the primary justification for why the US has claimed it raised rates in the past.
If the US raises rates this year, it looks like it could be very much alone in the world. In my lifetime, I have never seen such a context. Not sure it mattered prior to my lifetime as the economy wasn’t globally connected back then. This is history in the making. Can the US raise rates in a global context where the world is combating slowing growth, deflation, and in a few countries, currency printing induced hyperinflation?
