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Inflation "fever" persists, global tightening monetary policy increases

Date:2022-06-23  Hits:98
Source: Economic Information Daily
In response to persistently high inflation, central banks around the world are increasing the pace of interest rate hikes. Following the announcement of interest rate hikes in the United States, Brazil, Switzerland, the United Kingdom, Argentina and other countries last week, this week, the European Central Bank, the Bank of Korea, and the Australian Central Bank have issued remarks on continued tightening. Economists also pointed out that monetary tightening policy is necessary to control inflation, but in the context of the current slowdown in global economic growth, one should be wary of policies that are too aggressive and lead to an increased risk of economic recession.
Many central banks accelerate the pace of tightening

On June 20, local time, European Central Bank President Christine Lagarde said at a hearing in the European Parliament that the current economic activity in the euro zone is affected by many unfavorable factors such as high energy costs, deteriorating terms of trade, and the impact of high inflation on residents' disposable income. , facing greater uncertainty. Given the current inflationary environment, the ECB has decided to take further steps to normalize monetary policy and will decide on the pace of adjustment based on the latest data and an assessment of inflation developments over the medium term. Lagarde is reported to have reiterated her plan to raise interest rates twice in July and September, revealed at the end of last month.

On June 21, RBA Governor Philip Lowe said that the inflation rate in the fourth quarter is expected to reach 7%, and the RBA will prepare for further interest rate hikes and will dynamically adjust monetary policy based on economic data. The market is widely expected that the central bank will raise interest rates by 50 basis points in a row in July and August.

On the same day, the Bank of Korea said in a statement that South Korea's inflation rate this year may be higher than the May forecast. Analysts believe the statement further increases the likelihood that the central bank will raise interest rates by 50 basis points at its monetary policy meeting next month.

In fact, many central banks around the world have been accelerating the pace of monetary tightening recently.

The Federal Reserve announced on the 15th of this month to raise interest rates by 75 basis points, raising the target range of the federal funds rate to between 1.5% and 1.75%. This is the largest rate hike by the Fed since 1994. Previously, the Federal Reserve raised interest rates by 25 basis points and 50 basis points in March and May, respectively, and the pace of policy to control inflation accelerated significantly.

The Central Bank of Brazil announced on the evening of the 15th that it would raise the benchmark interest rate from 12.75% to 13.25%, marking the 11th consecutive rate hike. Middle East countries also acted quickly. The Central Bank of the United Arab Emirates and the Central Bank of Bahrain announced on the 15th that they would raise interest rates by 75 basis points, the Saudi Monetary Authority announced a 50 basis point increase, and Kuwait announced a 25 basis point increase. On the 16th, the Swiss National Bank raised interest rates for the first time since September 2007, and unexpectedly announced that it would raise the policy rate by 50 basis points from -0.75% to -0.25%. On the same day, the Bank of England announced that it would raise its benchmark interest rate from 1% to 1.25%, the fifth rate hike since December last year. In addition, Argentina's central bank also announced that the benchmark interest rate will be raised from 49% to 52%, the sixth time this year to raise interest rates.

Global inflationary pressures on the rise

In this cycle of rate hikes, central banks around the world acted swiftly and in unison, mainly because the rapid rise in inflation has become a global phenomenon.

When the new crown pneumonia epidemic broke out, many countries took interest rate cuts to boost economic growth. Now, factors such as the epidemic has increased supply chain bottlenecks and the Ukraine crisis has greatly pushed up inflationary pressures. Inflation rates in many countries have even hit record highs in decades, forcing central banks to reverse the direction of monetary policy.

At present, developed countries such as the United States, the United Kingdom, and Australia have officially entered the channel of raising interest rates to combat the high level of inflation, while emerging economies have also tightened monetary policies in order to curb intensified inflation, capital flight, and devaluation of their currencies. At least 45 central banks have raised benchmark interest rates this year, according to The New York Times. According to the "Nihon Keizai Shimbun" statistics, since the beginning of this year, central banks around the world have raised policy interest rates 80 times, the highest in history, among which emerging countries accounted for more than 60 times.

Nonetheless, inflationary pressures continue to mount globally. The latest data shows that the year-on-year increase in the consumer price index (CPI) in the United States in May was the highest since December 1981, and the month-on-month increase was also significantly larger than that in April. Biggest gain; the Bank of England expects CPI to be above 9% in the coming months and 11% in October, well above its 2% target.

The World Bank's "Global Economic Outlook" report released a few days ago said that in the context of soaring food and energy prices, rebounding demand, and continued supply chain bottlenecks, the market expects global inflation to peak in mid-2022, but remain high. Global inflation is expected to fall to 3 percent by mid-2023, about 1 percentage point above the 2019 average.

Recession "side effects" appear

While actively fighting high inflation, central bankers and economists are widely concerned that aggressive tightening to control inflation could tip the economy into recession at a time when global growth is already slowing.

"Nihon Keizai Shimbun" reported that the global financial tightening is triggering the return of venture capital. As the world raises interest rates rapidly and synchronously, capital begins to flee risk assets such as stocks and flows to other safe-haven assets, and its "side effects" on curbing economic growth prospects are beginning to appear. The U.S. Dow and European stock indexes are down more than 17% compared to the end of 2021. The S&P lost about 6% last week, its biggest weekly dro since the pandemic. An index of emerging market bonds tracked by Bloomberg also fell.

The New York Times quoted Barclays economists as saying that persistent inflationary pressures and deteriorating expectations are forcing the central bank to become more aggressive in formulating monetary policy. As financial conditions deteriorate and confidence declines, a deterioration in the real economy is likely to follow.

The World Bank has once again lowered its global economic growth forecast for 2022 and warned of the risk of "stagflation". The report pointed out that the Ukrainian crisis has caused a severe slowdown in regional economic growth, which has brought considerable global negative spillover effects, amplifying the problems caused by the epidemic such as supply chain bottlenecks and soaring inflation. Since the beginning of this year, the global economic growth rate is expected to decline sharply. The annual growth rate is expected to slow sharply from 5.7% in 2021 to 2.9% this year, and the growth rate from 2023 to 2024 will also hover around 3%.

World Bank President Malpass believes that the global economy is once again at risk and that a recession will be "hard to avoid" for many countries. He called for encouraging production and avoiding trade restrictions to safeguard food and energy supplies.
 
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