We have heard a lot of criticism from economists about how other central banks around the world are slow in increasing interest rates and that they should follow the US Federal Reserve to stabilize their respective currencies and control inflation. The simple answer is most other countries’ central banks can’t increase interest rates at the pace the US federal reserve is tightening and hence will have to let their currencies depreciate for a while. The reason why they can’t follow the US Federal reserve is housing loans. About 75% of existing US housing loans are fixed rate mortgages and hence their EMI doesn’t change for the life of the loan (till the house is paid off). Other countries don’t have this type of fixed-rate housing loan market. In most developed economies, interest rates were close to zero, and so were the mortgage rates. Now, if they increase interest rates at the same pace as the US Fed, people’s housing loan EMI’s could double or even triple in a year which is not an acceptable solution. Hence, they are caught between a rock and a hard place and have to live with a depreciating currency and higher inflation in the short-mid term (could be 1-2 years) till they can catch up with the US Fed.
