Xinhua Finance, Beijing, October 25 (Wang Shurui, Ma Mengwei) " rate hike " and "sustainment" ···················································································································································································································· Looking back at the beginning of the third quarter, after the Federal Reserve raised interest rates by 75 basis points in July, the market once speculated that the central bank would temporarily hold tightening and chose to raise interest rates by 50 basis points in September. It also had similar expectations for the Bank of England, the European Central Bank, etc. In fact, the rate hikes in developed and emerging market central banks did slow down in August as policymakers reassess the direction of inflation and energy prices. According to statistics, global central banks raised interest rates by 675 basis points in August, about half of the increase in the index interest rate in July. But in September, policy makers found that inflation showed no signs of peaking, and the "rate rate hike" was resurrected.
The Federal Reserve is aggressively "playing"
Faced with continued high inflation, the Federal Reserve is taking aggressive action to slow economic growth. The Federal Reserve announced at its September meeting that it raised the federal funds rate target range of 75 basis points to between 3% and 3.25%. This is a result that the market has already foreseen, but the information revealed in the dot chart describes a more hawkish interest rate outlook than the market expects. In June this year, officials expected interest rates to be 3.4% at the end of the year, while now they expect 4.4%. The Federal Reserve sends a strong signal to the market through the dot map that the future interest rate hikes will be greater and last longer. The median forecast of federal funds rate at the end of 2022 is 4.4%, and the median expected federal funds rate at the end of 2023 and 2024 is 4.6% and 3.9% respectively. Expectations show that the Fed will raise interest rates at least 75 basis points in 2022, and it is expected that interest rates will not be cut before 2024. Policymakers believe that inflation will slowly return to the Fed's 2% target in 2025 and may not cut interest rates until 2024.
chart: Fed dot chart (Source: Fed)
US investment management listed company T. Rowe Price US analyst Blerina Uruci said that one message this conveys is that interest rates will remain high for a longer period of time.
Federal Chairman Powell said the above interest rate path shows that the Fed will "unwaveringly" push inflation back from 40-year highs, and policy makers "will stick to it until the work is done", even with the risk of rising unemployment and slowing economic growth to stagnation.
Developed countries VS Emerging Market Central Banks
is driven by fighting inflation. Whether it is developed countries' central banks or emerging market central banks, they do not want to act behind, even if they face the risk of an economic recession.
Table: Changes in interest rates in developed economies (Source: Xinhua Finance)
In the third quarter, the European Central Bank raised interest rates by a total of 125 basis points, showing the European Central Bank's determination to fight out-of-control inflation. Policymakers are desperate to keep prices under control over fears that high inflation is becoming increasingly entrenched. Based on the current assessment, the Management Committee expects to further raise interest rates in the next few meetings, curb demand, and prevent the risk of inflation expectations continuing to move upward. The Board will regularly reassess its policy path based on the information received and the changing inflation outlook. Future policy interest rate decisions will continue to rely on data.
Chart: Eurozone interest rate level (Source: European Central Bank)
The Bank of England has raised interest rates to 2.25%, and the Bank of England has raised interest rates seven times since December last year.
The Swiss National Bank raised interest rates to 0.5%, ending its eight-year negative interest rate policy.
The Bank of Canada raised a total of 175 basis points to 3.25%, the highest interest rate level since March 2008.
RBA also continued to act, with RBA raising interest rates monthly, with interest rate levels reaching 2.35%; New Zealand Fed raising interest rates to 3%.
Swedish Central Bank raised the benchmark interest rate by 100 basis points at one time in September to 1.75%. This is the largest increase in the benchmark interest rate since 1993. The Swedish Central Bank said in a press release that the excessively high inflation level is weakening the purchasing power of Swedish households, making it more difficult for businesses and families to plan financially, so it is necessary to further tighten the monetary policy to make inflation reach its target level.
The Swedish central bank said that the future development of inflation is still difficult to assess and is expected to continue to raise the benchmark interest rate in the next six months to ensure inflation returns to its target level of 2%.
Figure: Eggs in a supermarket in Stockholm, Sweden, and laying hen feed costs have increased sharply, and egg production costs have risen. Inflation has hindered production of Swedish egg suppliers (Xinhua News Agency, photographed by Wei Xuechao)
The theme of "Reassessment of Economic and Policy Constraints" (Jackson Hall Conference) was held from August 25 to 27. The meeting highlighted the determination of the major developed economies to hike interest rates against high inflation.
Federal Chairman Powell's speech was titled "Monetary Policy and Price Stability", revealing that the focus of the Federal Reserve's monetary policy in the early stage will be on price stability, that is, to resist high inflation close to double-digit numbers at this stage.
European Central Bank officials expressed their attitude at the meeting that they needed to continue hikes in interest rates to curb inflation. French central bank governor Villeroy said the ECB should reach a "neutral" interest rate level of 1% to 2% by the end of the year.
Jackson Hall meeting sent out a few signals: the US and European Central Bank's interest rate hike policy will not be reversed at present, and it is necessary to see a signal of controlled inflation to change the policy. It is too early to consider a rate cut; the US and European Central Bank have fully prepared for the results of the economic and employment slowdown, and guided the market to accept this expectation; the specific rate hike requires observation of economic data.
The attitudes of central banks such as the United States and Europe also show the severe situation of increasing stagflation risks in some parts of the world.
Emerging market interest rate hikes are even greater, and the magnitude and speed of the US dollar's rise make policymakers in emerging market central banks unable to ignore it. The depreciation of their own currencies will intensify imported inflation, which is bad news for decision makers trying to curb price pressure, and the pressure of capital outflow cannot be ignored.
Photo: Citizens line up to cheer at a gas station in Vientiane, the capital of Laos (Xinhua News Agency, photo by Kai Qiao)
Argentina The cumulative inflation rate in the first nine months of this year was 66.1%, and the cumulative inflation rate in the past 12 months was 83%, the highest in the past 31 years. It is not impossible for the market to expect the inflation rate to exceed 100% in 2022. At present, the Argentina central bank has raised the benchmark interest rate to 75%, and further inflation will lead to further interest rate hikes.
"Central banks of various countries have the motivation to speed up their actions. They realize that it is best to make efforts to raise interest rates and strive to avoid further depreciation of currencies." said Ugo Lancioni, head of global exchange rate at fund management company Neuberger Berman.
IMF Chief economist Gopinath believes that it is too early to assert whether global inflation has reached its peak. The top priority of the economy at present is to curb inflation, and central banks must take decisive actions to bring inflation back to their targets. He believes that the risk of deaning inflation expectations is "very high" and expressed concern about the second round of inflation effects.
World Bank A study shows that most central banks around the world raise interest rates simultaneously to cope with inflation may put the world economy in recession; this is expected to bring financial crises to emerging markets and developing economies and cause lasting damage.
IMF President Georgieva also said that with the tightening of the financial environment and the appreciation of the US dollar, 25% of emerging markets are in or close to debt difficulties, and more than 60% of low-income countries are facing debt difficulties.
Table: Changes in interest rates in emerging market economies (Source: Xinhua Finance)
Alien in the "rate hike"
However, even though the same inflation problem is faced, the Turkish Central Bank and the Bank of Japan are not moved.
Turkish central bank continues to cut interest rates, lowering the benchmark interest rate to 12%. Türkiye's inflation rate has remained high this year, with the inflation rate in September reaching 83.45%, the highest in 24 years. Despite this, Türkiye still adheres to a low interest rate policy to help the economy recover from the impact of the new crown epidemic.
In the environment of rising global inflation, Japan, which had almost stagnated in price growth in the past 30 years, finally felt the pressure of inflation. Confrontation between domestic opinions on whether to raise interest rates or continue to remain loose.
The depreciation of the yen behind inflation has made a lot of "contributions". After the US dollar briefly broke the important psychological threshold of 145 against the yen, the Bank of Japan once again intervened in the foreign exchange market after 24 years.Bank of America estimates that the Bank of Japan, which has $1.3 trillion in foreign exchange reserves, may also intervene at most 10 more times by selling dollar assets.
Faced with challenges in the external environment, inflation expectations have declined. Russian Central Bank Although the interest rate cut has remained continuity, the decline has hit the smallest in recent months. Russian Central Bank Governor Nabiulina pointed out that both interest rate hikes and interest rate cuts may be the next move. In the short term, neutral interest rates will be above 5%-6%. Monetary policy is now in a neutral area, and the room for further interest rate cuts has been narrowed.
Future: Continue to act
In the fourth quarter, central banks will have more actions, and most of them give guidance on further interest rate hikes in the future.
Director of China Foreign Exchange Investment Research Institute Tan Yaling said that many central banks raise interest rates and strengthening austerity policies will make interest rates higher. Tan Yaling predicts that the European Central Bank and the Bank of England will inevitably raise interest rates in October, and inflation is the core driving force, but the poor economic environment may increase the risk of interest rate hikes. The radical monetary policy of major central banks will be the market focus, while emerging markets will passively follow.
Asian Development Bank Governor Masatsu Asagawa pointed out that the speed of normalization of Federal Reserve policies is "very fast" and has caused some market turmoil.
The market's expectations for the economic trends of countries around the world are an important reason for affecting exchange rate fluctuations. A study released by the World Bank on September 15 showed that global central banks hike interest rates simultaneously to cope with inflation may put the world economy in recession. Research points out that global central banks have been raising interest rates this year at a synchronous level that has not been seen in the past 50 years, and this trend may continue until next year. Investors expect the global monetary policy interest rate average to rise to nearly 4% by 2023, more than 2 percentage points higher than in 2021.
However, the current expected rate hike trajectory and other policy actions may not be enough to reduce global inflation to pre-pandemic levels. To reduce inflation to target levels, central banks may need to raise interest rates by an average of another 2 percentage points. Under this circumstance, if financial market pressure is added, the global GDP growth rate will slow down to 0.5% in 2023, and shrink by 0.4% per capita, which is in line with the technical definition of a global recession.
World Bank President Malpass said global economic growth is slowing sharply, and growth may slow further as more countries fall into recession.
Fed policymakers have also become more pessimistic about the outlook for economic growth. Forecasts show that one policymaker believes the U.S. economy will shrink next year, although most policymakers believe there will be expansion this year and next year. The median expected GDP growth rate of the U.S. at the end of 2022, 2023 and 2024 will be 0.2%, 1.2%, and 1.7% respectively (the June forecast will be 1.7%, 1.7%, and 1.9% respectively), and the median expected GDP growth rate of the end of 2025 will be 1.8%.
Figure: Fed's expectations for US GDP (Source: Fed)
According to the forecasts of Fed policymakers, positive measures to reduce inflation to the target of 2% will take years to complete, at the cost of a significant increase in unemployment and slowdown in economic growth. Analysts said that Powell did not say that the United States would fall into a recession, but the Federal Reserve expects the unemployment rate to rise to 4.4% next year. Historically, the United States has never avoided a recession in the case of such an increase in the unemployment rate. The Federal Reserve is implicitly acknowledging that the recession is inevitable. The latest forecast shows that the Fed's interest rate hike will push up the unemployment rate, which is currently 3.5%, reaching 3.8% in the fourth quarter and 4.4% in the fourth quarter of 2023. The Sahm rule named after Claudia Sahm, a former Fed employee, shows that once the three-month moving average of the unemployment rate is half a percentage point higher than the lowest three-month average in the past 12 months, the U.S. economy is usually in a recession, with the current lowest value of about 3.56%, indicating that the U.S. will usher in a recession.
analyst Omair Sharif said that if the Fed's unemployment rate forecast in 2023 reaches 4.4%, then, under the same conditions, it will mean that 1.235 million new jobs will be added. When considering the price of reducing inflation, at least more than one million people will lose their jobs. This series of prediction data of
has caused institutions to gradually give up expecting a "soft landing" of the US economy. JP Morgan CEODimon bluntly stated that the possibility of "soft landing" and a moderate recession is very small.JPMorgan analyst David Kelly believes that the U.S. economy cannot afford interest rates of 4.25% to 4.5%.
Sinan Global Investment analyst Seema Shah said that a "soft landing" is almost impossible based on the Fed's latest interest rate forecast. Powell acknowledged that economic growth will be below trend levels for some time, which should be interpreted as saying recession. From now on, the situation will become even more serious.
CITIC Securities research report pointed out that the hawkish dot map conveys the Fed's current tightening stance, and it is expected that policy shifts will be difficult to see in the short term. The rate hike level this year may be above 4%, and the end point of this round of interest rate hike may be around 5%. The latest economic forecast implies the risk of an economic recession. The Federal Reserve may have to cool down inflation through economic recession in this round. It is expected that the US economy may fall into a substantial recession in the second half of next year.
Vanguard Group analysts estimate that the probability of the United States falling into a full recession at some point in the next 12 months is 25%, and the probability of the full recession at some point in the next 24 months is 65%.
Europe's recession expectations are even more serious, the ECB describes the evolution of the winter economic trend as "stagnation", while the market expects the euro region to usher in a recession in the winter. Analysts say sky-high energy will weaken purchasing power and will almost certainly put euro zone into recession, while aggressive rate hikes from the ECB could exacerbate the recession, especially as the government tries to help those most affected, with the rising cost of borrowing. The central bank is also unable to withstand inflation caused by supply-side interference. Now rate hikes will affect the economy for years to come, when inflation is eased on its own. However, if you dare not let go now, it may raise long-term inflation expectations from already high levels to higher, thereby weakening the ECB’s credibility against inflation and challenging its responsibilities.
Institutions believe that although the widespread nature of euro zone inflation makes it difficult for policy makers to respond perfectly based on monetary policy alone, it is inevitable to continue to raise interest rates, and the specific effect can only be observed continuously, because the situation is very changeable. Dutch International Bank expects that the European Central Bank will suspend rate hikes as early as the winter due to the upcoming recession, and it is still difficult to see how far radical rate hikes can reduce the overall inflation rate in the euro zone.
Overall, as the central bank vigorously raises interest rates, exchange rate volatility is expected to continue to expand in the fourth quarter.
Editor: Wang Xiaowei
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