With consumer prices rising sharply, central bankers are having to work hard to resist the temptation to lift interest rates. A real-estate boom could make the job even tougher.
Monetary policy is already being tightened. So far in 2021, there have been eight rate cuts and 19 increases, the latter by central banks in Russia, Brazil and Turkey among others, data by Bank of America shows. The anticipation of pandemic-era monetary stimulus coming to an end in rich nations too is weighing on investor sentiment. Stocks have taken a hit since Federal Reserve officials released projections Wednesday showing that rates could go up in 2023.
Then, on Thursday, Norway’s central bank all but guaranteed it will increase borrowing costs in September, placing it far ahead of the Fed and even the Reserve Bank of New Zealand, which was the first to spook markets back in March. Developed countries have a lot more leeway to leave rates low than emerging ones, because they suffer far less from volatility in commodity prices and the U.S. dollar. But the Norges Bank said in a statement that it “placed weight on the marked rise in house prices.”
Residential property markets around the world are rallying. Norway’s looked frothy far before the pandemic and home prices have risen 12% from January 2020. In the U.S., the U.K. and Germany, prices are up 15%, 13% and 16%, respectively. In China, property is once again emerging as a key driver of economic growth.
In theory, central banks set rates based on inflation and, in the Fed’s case, unemployment. After the 2008 mortgage crisis, however, officials in many countries started taking financial imbalances into account as well.
