Global interest rates rose by 675 basis points in January as four major emerging market central banks raised their policy rates to quell inflationary pressures from a depreciation of their currencies, in effect transmitting the U.S. Federal Reserve's tapering of asset purchases across borders.
After pumping $85 billion into the global economy every month since September 2012, the Fed took the first step toward normalizing monetary policy in January after the global financial crises by trimming its monthly purchases of U.S. Treasuries and mortgage-related debt by "a modest" $10 billion to $75 billion.
Although the Fed's exit from extraordinary accommodative policy was flagged in May and first given the green light in December, the reduced liquidity being pumped into global markets is affecting exchange rates and asset prices far beyond expectations and even triggering recriminations against the Fed for being selfish and not considering the global implications of its shift toward tighter policy.
But criticizing the Fed for not acting as the world's central bank and surprising markets with its decision to start winding down asset purchases misses the point.
An increasingly transparent Fed, one of the legacies of now former chairman Ben Bernanke, has clearly communicated its thinking around quantitative easing, so much that it may even have ended up confusing markets. And, the Fed, like all other central banks, are legally bound to fulfill domestic goals and are part of national governments, not supra-national organizations.
The real issue is that global policy makers have yet to come up with a workable model for global economic governance for the 21st century that balances sovereign rights versus the common good.
January's interest rate hikes by Brazil, India, Turkey, South Africa - four of the so-called "Fragile Five" - totaled 675 basis points, almost twice the highest monthly rise seen in the last 12 months.
In addition, Gambia's central bank maintained its rate at 20 percent, according to its policy statement from Jan. 31. However, it is unclear when Gambia actually raised its benchmark rediscount rate as the previous policy statement stems from June 21, 2013 when the rate was raised by 400 basis points to 18 percent at an emergency committee meeting. Until further notice, Gambia is therefore counted as raising its rate in January for the purpose of tracking rates and calculating a global average.
In contrast, five central banks (Romania, Hungary, Jordan, Tajikistan and Uzbekistan) cut their rates by a total of 335 points for a net increase in January of 540 points. (675 points plus Gambia's 200 points minus 335 points)
This pushed up the Global Monetary Policy Rate (GMPR) - the average rate of the 90 central banks followed by Central Bank News - to 5.56 percent at the end of January, up from 5.41 percent at the end of December, but still below 2013's average GMPR of 5.61 percent and 2012's 6.20 percent.
The actual rise in January's GMPR, however, was less than indicated as the rate already rose to 5.47 percent with the start of the new year as Latvia joined the Eurosystem, subordinating its monetary policy to that of the European Central Bank (ECB).
Although the global economy remains fragile and rates were raised rate in response to inflationary pressures from lower currencies rather than from strong demand, January brought further evidence that the trend in global monetary policy is turning toward a tightening.
Of the 41 decisions taken by central banks in January, 12 central banks (Malaysia, Uganda, Korea, Brazil, Turkey, Nigeria, Mexico, New Zealand, South Africa, India, Bangladesh and Mauritius) specifically referred to inflationary risks in their policy statement.
Emerging market central banks remain under pressure to raise rates further to ensure that the real yields on their domestic assets remain internationally competitive as they balance the dampening impact on economic activity from higher rates against rising inflation from a decline in their exchange rates.
New Zealand stands out because it's the only advanced economy that is preparing to raise rates.
If the Reserve Bank of New Zealand (RBNZ) meets expectations and raises its policy rate in March, it will be the first rate rise by an advanced economy central bank since January 2011 when the Bank of Israel (BOI) raised its rate, followed by Sweden's Riksbank the next month. Both Israel and Sweden reversed course later that year as the global economy weakened.
Unlike the emerging market economies, New Zealand's dollar has maintained its strength ever since it soared on safe-haven demand in 2009. More recently, the dollar - known as the kiwi - has drawn strength from yen-based carry trades. Nevertheless, the central bank is getting ready to raise rates to ensure inflation doesn't exceed its 2.0 percent target due to growing pressures from booming construction, projected prices rises by companies and an expected decline in the kiwi.
After warning in July last year that it would have to start removing monetary stimulus, the RBNZ has gradually been ratcheting up its language and in January said this change in policy was expected to start "soon," a sign that rates are very likely to be raised at the bank's next policy meeting in March.
Manuel Ramos-Francia, deputy governor of the Bank of Mexico, summed up the current trend in global monetary policy on Feb. 3:
"What is probably very certain is that interest rates in the U.S. are going up, and interest rates in the rest of the world are going up," he said at an event sponsored by Credit Suisse in Sao Paulo, Brazil.
GLOBAL MONETARY POLICY RATES (GMPR)
(Changes in January 2014 in basis points)