Bitesize: Riding the waves: the breadth of global monetary policy changes

Shaheen Bhikhu and Thomas Viegas

Central banks respond to inflation by setting interest rates in order to achieve domestic price stability.  Occasionally, economic shocks are global in nature and so monetary policy can move in tandem across the world. But how common have directional changes in monetary policy been across the world over recent decades?

To answer this, we developed a monetary policy diffusion index (MPDI) to illustrate the breadth of monetary policy changes. The diffusion index is calculated as = 1* per cent of central banks increasing interest rates + 0.5* per cent leaving rates unchanged + 0* per cent reducing rates.

A reading above/below 50 indicates that more central banks have increased/reduced interest rates relative to the previous quarter, than the reverse. The MPDI does not include changes in other monetary policy tools, such as asset purchases.

Chart 1: Global monetary policy diffusion index (MPDI)

The global MPDI highlights two periods of broad policy easing over recent decades (Chart 1). In 2009, an average of 25 out of 39 major central banks cut rates each quarter in response to the Global Financial Crisis. In 2020, a broadly similar proportion cut rates to support growth and inflation in response to Covid-19.

More recently, the MPDI underscores the breadth in policy tightening against elevated inflationary pressures. In 2022 Q2, just under 30 major central banks raised rates, the highest proportion since the Index began.

Chart 2 splits the MPDIs for advanced and emerging market economies. It shows that the correlation between them is lower outside of the periods of global macroeconomic shocks.

Chart 2: MPDI for advanced economies and emerging market economies

---

Shaheen Bhikhu works in the Bank’s International Surveillance Division and Thomas Viegas works in the Bank’s Market Intelligence and Analysis Division.

If you want to get in touch, please email us at bankunderground@bankofengland.co.uk or leave a comment below.

Comments will only appear once approved by a moderator, and are only published where a full name is supplied. Bank Underground is a blog for Bank of England staff to share views that challenge – or support – prevailing policy orthodoxies. The views expressed here are those of the authors, and are not necessarily those of the Bank of England, or its policy committees.