In response to high inflation, central banks around the world are accelerating the pace of raising interest rates. After the US, Brazil, Switzerland, the UK, Argentina and other countries announced to raise interest rates last week, the European Central Bank, the Bank of Korea, the Bank of Australia and other countries have made statements to continue tightening this week. Economists also pointed out that monetary tightening policy is necessary to control inflation, but in the context of the current global economic slowdown, we should be vigilant against the risk of economic recession caused by overly aggressive policies.
Multinational central banks accelerate tightening
On June 20 local time, when attending the hearing of the European Parliament, European Central Bank President Christine Lagarde said that the current economic activities in the euro area are affected by many adverse factors, such as high energy costs, deteriorating terms of trade and the impact of high inflation on Residents' disposable income, and face greater uncertainty. In view of the current inflation environment, the European Central Bank has decided to take further measures to normalize monetary policy, and will decide to adjust the speed according to the latest data and the assessment of the medium-term development of inflation. It is reported that Lagarde reiterated the two interest rate hikes in July and September disclosed at the end of last month.
On June 21, the governor of the Bank of Australia, Philip Lowe, said that the inflation rate in the fourth quarter was expected to reach 7%, and the Bank of Australia would prepare for further interest rate hikes, and would dynamically adjust monetary policy according to economic data. It is widely expected that the central bank will raise interest rates by 50 basis points in July and August.
On the same day, the Bank of Korea said in a statement that the inflation rate of South Korea this year may be higher than the forecast value in May. Analysts believe that this statement further increases the possibility of the central bank raising interest rates by 50 basis points at the monetary policy meeting next month.
In fact, recently, many central banks around the world are accelerating the pace of monetary tightening.
On the 15th of this month, the Federal Reserve announced an interest rate increase of 75 basis points, raising the target range of the federal funds rate to between 1.5% and 1.75%. This is the largest single interest rate increase by the Federal Reserve since 1994. Previously, the Federal Reserve raised interest rates by 25 basis points and 50 basis points respectively in March and may, significantly accelerating the pace of its policy to control inflation.
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%, the 11th consecutive interest rate increase. Middle Eastern countries also moved quickly. The Central Bank of the United Arab Emirates and the Central Bank of Bahrain announced a 75 basis point increase in interest rates on the 15th, the Saudi Monetary Authority announced a 50 basis point increase in interest rates, and Kuwait announced a 25 basis point increase in interest rates. On the 16th, the Swiss central bank raised interest rates for the first time since September2007, and unexpectedly announced that it would raise the policy interest rate by 50 basis points from -0.75% to -0.25%. On the same day, the Bank of England announced that it would raise the benchmark interest rate from 1% to 1.25%, the fifth interest rate increase since December last year. In addition, the Central Bank of Argentina also announced that it would raise the benchmark interest rate from 49% to 52%, the sixth interest rate hike this year.
Rising global inflationary pressure
In the current interest rate hike cycle, central banks around the world acted quickly and in step, mainly because the rapid rise in inflation has become a global phenomenon.
When the outbreak of COVID-19 broke out, many countries took interest rate cutting measures to boost economic growth. Now, the epidemic has increased the bottleneck of the supply chain and the crisis in Ukraine and other factors have significantly increased the inflation pressure. The inflation rate in many countries has even reached the highest level in decades, leading to the central banks having to change the direction of monetary policy.
At present, the United States, the United Kingdom, Australia and other developed countries have officially entered the channel of raising interest rates to combat the high inflation level, while emerging economies have also tightened their monetary policies in order to curb inflation, capital flight and devaluation of their currencies. According to the New York Times, at least 45 central banks have raised their benchmark interest rates this year. In addition, according to the statistics of Nihon Keizai Shim bun, since this year, central banks around the world have raised policy interest rates 80 times, the highest number in previous years, of which emerging countries account for more than 60 times.
Nevertheless, inflationary pressures are still rising globally. According to the latest data, the year-on-year increase of 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; New Zealand's CPI rose 6.9% year-on-year in the first quarter, the largest increase since the second quarter of 1990; The Bank of England expects CPI to exceed 9% in the coming months and 11% in October, far exceeding the target of 2%.
According to the global economic outlook report released by the world bank a few days ago, against the background of soaring food and energy prices, rebounding demand and persistent supply chain bottlenecks, the market expects global inflation to peak in mid-2022, but still remain high. By the middle of 2023, the global inflation rate is expected to fall to 3%, about 1 percentage point higher than the average level in 2019.
"Side effects" of economic recession
While actively fighting against high inflation, central bankers and economists are generally worried that the aggressive tightening policies taken to control inflation may plunge the economy into recession against the background of the current slowdown in global economic growth.
The Japanese Economic News reported that the global financial contraction is causing the return of venture capital. With the rapid rise of global interest rates, capital began to flee from risky assets such as stocks to other safe haven assets, and its "side effects" on curbing the prospects of economic growth began to appear. Compared with the end of 2021, the US Dow Jones index and the European stock index fell by more than 17%. The S & P index fell about 6% last week, the largest weekly decline since the outbreak. The emerging market bond index tracked by Bloomberg also fell.
The New York Times quoted Barclays economists as saying that the persistent inflationary pressure and deteriorating expectations are forcing the central bank to become more aggressive in formulating monetary policy. As the financial situation deteriorates and confidence declines, the deterioration of the real economy may follow.
The World Bank recently lowered its global economic growth forecast for 2022 and warned of the risk of "stagflation". The report points out that the Ukrainian crisis has caused a serious slowdown in regional economic growth, brought considerable negative global spillover effects, and amplified the problems caused by the supply chain bottleneck, soaring inflation and other epidemics. Since the beginning of this year, the global economic growth is expected to decline significantly. The annual growth rate is expected to slow down from 5.7% in 2021 to 2.9% this year. The growth rate from 2023 to 2024 will also hover around 3%.
World Bank President Marcus believes that the global economy is once again in danger. For many countries, economic recession will be "inevitable". He called for encouraging production and avoiding trade restrictions to ensure food and energy supplies.
Source: Economic Information Daily
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