When will the global ＂interest rate hike＂ press the ＂pause button＂？
The picture shows the Federal Reserve Building filmed in Washington, USA. Xinhua News Agency reporter Liu Jieshe
Last week, the first super "Central Bank Week" in 2023 hit hard. Many central banks, such as the Federal Reserve, the European Central Bank, the Bank of England and the Reserve Bank of Australia, have successively announced interest rate policy resolutions, which continue to attract great attention from the global market.
In 2022, the world’s major central banks raised interest rates at the fastest speed and the largest scale in more than 20 years, and made every effort to curb soaring inflation. Recently, with the announcement by many central banks to stop the interest rate hike cycle, the Federal Reserve has also slowed down the pace of interest rate hike, and the highly consistent global interest rate hike has been "diverted". There is a heated debate in the international community: when will the "pause button" be pressed in this round of global interest rate hike? Where will the world economy go?
Experts believe that with the gradual slowdown of inflation and increasing economic pressure, it is not far from the suspension of interest rate hikes by European, American and British central banks. The key point of disagreement is when to cut interest rates. In any case, the road ahead for major central banks is not easy, and it is necessary to strike a good balance between fighting inflation and stabilizing the economy.
There is a "diversion" in the global central bank’s interest rate hike
Recently, the "boots" of the Federal Reserve, the European Central Bank and the Bank of England to raise interest rates have landed as scheduled.
The United States has always been a "wind vane" for raising interest rates. On February 1, local time, the Federal Reserve announced that it would raise the target range of the federal funds rate by 25 basis points to 4.5% to 4.75%, which was in line with market expectations. This is the eighth consecutive rate hike by the Federal Reserve since March last year, and it is also the first rate hike of only 25 basis points in the current rate hike cycle, which means that the Fed has further slowed down the pace of interest rate hikes.
Compared with the Federal Reserve, the European Central Bank and the Bank of England continue to "catch up".
The European Central Bank held a monetary policy meeting on February 2, local time, and decided to raise the three key interest rates in the euro zone by 50 basis points, and reiterated that it would continue to raise interest rates by 50 basis points in March. Since July 2022, the European Central Bank has raised interest rates sharply for four consecutive times, with a cumulative increase of 250 basis points.
On February 2, local time, the Bank of England announced that it would raise interest rates by 50 basis points and raise the benchmark interest rate to 4%. This is the tenth consecutive rate hike by the Bank of England since December 2021.
On February 7, local time, the Reserve Bank of Australia announced that it would raise the benchmark interest rate by 25 basis points to 3.35%, and at the same time raise the interest rate of foreign exchange settlement balance by 25 basis points to 3.25%. This is the ninth consecutive rate hike by the Australian central bank since May 2022. The Australian central bank said that it may continue to raise interest rates in the coming months to cope with high inflation.
The above countries have continued the pace of raising interest rates in the past year. However, due to the pessimistic expectation of economic recession, many central banks recently announced that they would slow down or even stop the interest rate hike cycle.
On January 25th, local time, the Bank of Canada announced that it would raise interest rates by 25 basis points, raising the benchmark interest rate to 4.5%, and said that if the economic development situation is roughly equivalent to the monetary policy outlook, it is expected to maintain the policy interest rate at the current level. As a result, the Bank of Canada became the first central bank in G7 to formally state that it "conditionally suspended interest rate hikes".
On January 19th, Malaysia’s central bank unexpectedly announced that it would stop raising interest rates and keep the benchmark interest rate at 2.75%. On the same day, the Norwegian central bank also announced the suspension of interest rate hikes, but hinted that it is still possible to raise interest rates by 25 basis points in March to control the inflation rate. Indonesia raised interest rates by 25 basis points as scheduled and raised the benchmark interest rate to 5.75%, which is close to the end of the interest rate hike cycle.
Be led by the Fed’s interest rate hike
"If we sum up the main characteristics of the global financial market in 2022 in one sentence, it is — — Expected ‘ Stagnation ’ And the real ‘ Expansion ’ Interwoven. The biggest event in the global monetary and financial system in 2022 is the rapid tightening of the Fed’s monetary policy caused by inflation exceeding expectations. " Hu Zhihao, a researcher at the Institute of Finance of China Academy of Social Sciences and deputy director of the National Finance and Development Laboratory, told this reporter that the aggressive interest rate hike by the Federal Reserve forced the global economy into the risk of tightening spillover. Due to multiple considerations such as curbing inflation and stabilizing the exchange rate of local currencies, many central banks have to follow the Fed to raise interest rates. According to the statistics of the Bank for International Settlements, in 2022, 38 central banks around the world raised interest rates 210 times. Among them, many developed economies even raised interest rates by 75 basis points at a time.
"The dollar is the core currency of the global financial cycle. There are great differences in the motives of the Fed’s previous interest rate hikes, but they can be broadly classified into three types: economic overheating, inflation and pure monetary policy shock. This round of Fed interest rate hikes has three characteristics: high inflation-driven, first fast and then slow, and the combination of interest rate hikes and shrinking tables. " Hu Zhihao said.
Since 2022, why has the Federal Reserve raised interest rates frequently and aggressively, thus triggering a global interest rate hike?
"The direct cause is the continuous tightening of monetary policy caused by inflation exceeding expectations." Hu Zhihao analyzed that as early as the first quarter of 2021, the United States began to show signs of rising inflation. But throughout 2021, the Federal Reserve and financial markets are constantly strengthening a belief — — Inflation is only a short-term problem. Due to the misjudgment of overestimating the elasticity of total supply and the concern about the sustainability of total demand, coupled with the mindset formed by long-term low inflation environment, the expectation of short-term inflation continued until the first quarter of 2022. Since then, in order to curb the increasingly serious inflation problem, the Fed has to raise interest rates frequently and substantially.
"Since the financial crisis in 2008, the United States has implemented monetary and fiscal policies to stimulate economic growth, paying special attention to increasing employment opportunities and promoting a strong economic recovery. At the same time, there has also been an overheating phenomenon in which the inflation rate has been rising and the unemployment rate has dropped rapidly." Guo Hongyu, a professor at the School of Finance of the University of International Business and Economics, said in an interview with this reporter that after the outbreak of the COVID-19 epidemic, the Federal Reserve implemented extraordinary fiscal and monetary policies. The soaring inflation in the United States is the result of a combination of factors such as overheating of the domestic economy, rising international commodity prices caused by the conflict between Russia and Ukraine, and poor global supply chain under the impact of the epidemic. In addition, the Fed misjudged the seriousness and persistence of high inflation, and the austerity policy was not introduced in time, which led it to adopt overcorrective measures to deal with high inflation.
Regarding the recent slowdown of the Fed’s interest rate hike, Fed Chairman Powell said at the press conference after the monetary policy meeting that the Fed decided to slow down the pace of interest rate hike in consideration of the cumulative tightening effect of monetary policy and the lag of its impact on economic activities and inflation, which will help the Fed to assess whether the economy is moving towards the goal and determine the rate hike required to achieve a sufficiently restrictive policy stance in the future.
"This time, the Federal Reserve raised the target range of the federal funds rate to 4.5%-4.75%, which is close to the conventional level of around 5%, and there is limited room for a substantial rate hike. Considering the lag of the policy effect, it should be a matter of monetary policy rhythm for the Fed to slow down the rate hike and observe the policy effect. " Guo Hongyu, who is visiting the United States recently, also observed that on the one hand, although the price of gasoline in the United States is still at a high level, it has already dropped, and the price of gasoline in California has returned from the prefix "5" to the prefix "4". The statistics of January this year also showed that the inflation growth rate slowed down. On the other hand, the rise in interest rates leads to the appreciation of the US dollar and the expansion of the trade deficit. In the case that inflation in the United States continues to fall beyond expectations and the downward pressure on the economy is greater, there is no need for the Federal Reserve to raise interest rates aggressively. Further slowing down interest rate hikes is basically consistent with the current macroeconomic situation in the United States.
"Due to differences in economic fundamentals and inflation trends among economies around the world, the interest rate hike cycle is not completely synchronized." Hu Zhihao said that some emerging market countries have "snapped up" major developed economies since the beginning of the interest rate hike cycle. As the external supply shock has obviously eased the inflationary pressure on the country, the time to stop raising interest rates will be earlier. However, at least from the first half of this year, it cannot be completely asserted that the global "interest rate hike" will end.
The inflation reduction target is hopeless in the short term.
Although inflation in Europe and the United States has dropped in succession, it is still far from reaching the ultimate goal.
Jerry Chen, a senior analyst at Jiasheng Group, said that the United States has experienced many periods of high inflation in history, and the Fed failed to immediately return inflation to the target of 2%-3%. Since 1920, there have been 13 times of high inflation in the United States. The inflation rate has soared to more than 5%, and the average peak of inflation is 9.2%. After reaching the peak, the inflation will slow down to 5.1% after an average of 12 months, which means that the inflation in the United States may come to 5.1% in May this year. According to historical data, the average inflation in the United States has dropped below 4% in 21 months, which means that the inflation in the United States may drop below 4% in the first quarter of 2024.
It cannot be ignored that there are still uncertainties about whether inflation in the United States can continue to fall and whether a "soft landing" can be realized. Summers, former US Treasury Secretary, said that due to the high uncertainty of the US economic outlook, the Federal Reserve should avoid signaling its next move after raising interest rates this week.
"At present, the unemployment rate, excessive wage growth and negative labor productivity are the main obstacles for the Fed to curb inflation." Guo Hongyu said that in January this year, the average hourly wage of American employees was $33.03, up 10 cents from the previous month and up 4.4% year-on-year. The rapid increase in wages is not conducive to curbing inflation. If inflation can’t fall significantly in the future, the Fed can only continue to maintain the tightening policy and cool the labor market by squeezing aggregate demand.
"For the Fed, achieving the 2% inflation target is already challenging, and it is even more difficult for the European Central Bank." Hu Zhihao analyzed that the euro zone is facing a more severe "stagflation" problem than the United States, and has entered the recession cycle ahead of the United States. With the global economic slowdown and the continuous fall of energy prices, the high point of overall inflation in the euro zone has appeared in October 2022, but core inflation is still at a high level. Driven by labor shortage and rising wages, the contribution rate of service inflation in core inflation may rise steadily, making its inflection point lag behind the overall inflation. In the short term, it is more difficult for the European Central Bank to make an optimal intertemporal choice under the environment of multiple factors such as the global financial conditions continue to tighten, the total demand continues to fall, and the energy crisis continues to delay. As the demand effect of austerity policy continues to play its role, the European Central Bank may continue to revise its economic growth forecast downwards in the future, and evolve from a "shallow recession" to a "deep recession".
The World Bank has warned that the global "interest rate hike" will push the global economy into recession, especially developing countries will face a series of financial crisis risks and lasting damage.
"The spillover effect of the Fed’s interest rate hike on emerging market countries depends not only on the motivation of interest rate hike and the fundamentals of the US economy, but also on the economic fundamentals of emerging market countries." Guo Hongyu said that under the background of this round of high inflation driving the Federal Reserve to raise interest rates sharply and shrink its table, some emerging market countries with fragile fundamentals are facing triple impacts of sharp depreciation of exchange rates, continuous capital outflow and financial market shocks.
"Global growth is slowing sharply, and as more countries fall into recession, growth may slow further." In September last year, the World Bank issued a report suggesting that central banks should strengthen coordination, communicate clearly on policy decisions, and maintain independence, which will help to anchor inflation expectations and reduce the required degree of austerity. Central banks in developed economies should pay close attention to the cross-border spillover effect of monetary tightening. Emerging markets and developing economies should strengthen macro-prudential supervision and establish foreign exchange reserves. (Reporter Jia Pingfan)