Developed countries’ “interest rate hike” hits the world economy
In the face of persistently high inflation, the Fed’s aggressive rate hikes kept pace, causing central banks in many countries to follow suit. There is an intensive “wave of interest rate hikes” around the world, and many developed economies have aggressive operations of raising interest rates by 50 to 75 basis points at a time. In this regard, a number of international organizations pointed out that the continued interest rate hikes in developed economies have pushed up the risk of a global recession and may cause lasting damage to emerging markets and developing economies.
Fed’s aggressive rate hikes trigger a chain reaction
On November 2, the U.S. Federal Reserve announced another 75 basis point interest rate hike, raising the target range for the federal funds rate to between 3.75% and 4%. This is the fourth consecutive rate hike by the Fed by 75 basis points. Since March, the Fed has raised interest rates six times in a row, with a cumulative rate hike of 375 basis points.
Currently, U.S. inflation remains at a historically high level. According to data released by the US Department of Labor on October 13, the US consumer price index (CPI) in September this year increased by 0.4% month-on-month and 8.2% year-on-year. The core CPI rose by 0.6% month-on-month for two consecutive months, and the year-on-year increase expanded to 6.6%. Bank of America Global Research said recent U.S. inflation data was significantly higher than expected, reinforcing the Federal Reserve’s stance on continuing to tighten monetary policy.
Under the influence of the Fed’s strong contractionary policy, many developed economies were forced to follow up with interest rate hikes out of considerations such as curbing inflation, preventing capital outflows, and stabilizing their currency exchange rates.
The European Central Bank announced a few days ago that it will raise the three key interest rates in the euro zone, including the deposit mechanism interest rate, the main refinancing rate, and the marginal lending rate, by 75 basis points. This is the third time the European Central Bank has raised interest rates this year. Under the complex situation of high inflation, high debt, weak euro and energy crisis, the European Central Bank has raised interest rates by 200 basis points this year.
At the same time, facing the highest inflation level in 40 years, the Bank of England raised its benchmark interest rate from 2.25% to 3% on November 3. This is the eighth time since December last year that the Bank of England has raised interest rates. A British economic analyst said that due to high inflation, the Bank of England may not turn to a low interest rate policy until 2024.
Many central banks continued to follow up. The Bank of Canada recently announced a 50 basis point interest rate hike, raising the benchmark interest rate to 3.75%. This is the sixth time the Bank of Canada has raised interest rates this year. The Reserve Bank of Australia announced on November 1 that it would raise the benchmark interest rate by 25 basis points to 2.85%, while raising the interest rate on foreign exchange settlement balances by 25 basis points to 2.75%. This is the seventh time the RBA has raised interest rates this year.
Central banks around the world have been raising interest rates this year at a level not seen in 50 years, a trend that could continue into next year, according to a World Bank study released in September. Investors expect the average global monetary policy rate to rise to nearly 4% in 2023, more than 2 percentage points higher than in 2021. However, the currently expected trajectory of rate hikes and other policy actions may not be enough to bring global inflation down to pre-pandemic levels.
Greatly exacerbated the downward pressure on the global economy
In the latest World Economic Outlook report, the International Monetary Fund pointed out that the tightening of financial conditions in most regions, the ongoing crisis in Ukraine and the ongoing COVID-19 pandemic have seriously affected the outlook for the global economy. Global economic growth is expected to slow from 6.0% in 2021 to 3.2% in 2022, with a further slowdown to 2.7% in 2023.
The “2022 Trade and Development Report” released by the United Nations Conference on Trade and Development recently predicted that the global economy will grow by 2.5% in 2022, and the economic growth rate will slow down to 2.2% in 2023. The report pointed out that monetary and fiscal policies in advanced economies could lead to global recession and long-term stagnation. Rapid interest rate hikes and fiscal tightening in developed economies, combined with the impact of the epidemic and the Ukrainian crisis, have turned global economic growth from a slowdown to an economic downturn, and a soft landing is unlikely.
The United Nations Conference on Trade and Development also warned that sharp U.S. interest rate hikes would significantly reduce incomes in developing countries. The currencies of about 90 developing countries have depreciated against the US dollar this year, and more than a third of them have depreciated by more than 10%. Currently, 46 developing countries have been severely affected by multiple economic shocks, exacerbating the risk of a global debt crisis.
Chen Fengying, a researcher at the China Institute of Contemporary International Relations, told this reporter that the Fed took the lead in aggressively raising interest rates, and emerging markets and developing economies bore the brunt. A large number of developing countries face enormous pressures such as the depreciation of their currencies against the US dollar, capital outflows, rising financing and debt servicing costs, imported inflation, and commodity market volatility. At the same time, this year is different from the spillover effects of previous U.S. monetary policy adjustments. The Fed’s rate hikes are even more destructive to the economies of developed countries.
“Under the negative influence of geopolitical conflicts, there is still great uncertainty in the global commodity market, and inflation and energy crises in Europe and other regions have always been ‘fevering’. It has pushed up the cost of bulk commodity imports and exacerbated inflationary pressures in developed countries. The European Central Bank raised interest rates sharply to curb inflation, exacerbating the market’s pessimistic expectations for its economic prospects.” Chen Fengying said.
Preliminary data released by Eurostat on October 31 showed that in the third quarter of this year, both the euro zone and the EU gross domestic product (GDP) grew by only 0.2% from the previous quarter. The International Monetary Fund’s forecast shows that in 2023, the euro area’s economic growth rate is only 0.5%, the slowest growth among the world‘s major economies.
“The global exchange rate has depreciated due to the rise of the dollar, which is the lethality of the Fed’s recent intensive and substantial interest rate hikes.” Chen Fengying said.
In the United States, which caused the “interest rate hike”, its own economic data is not good. Fitch, an international rating agency, recently lowered its GDP growth forecast for the United States in 2023, and warned that stubborn inflation and sharp interest rate hikes by the Federal Reserve will push the U.S. economy into recession from the spring of 2023. Fitch forecasts U.S. GDP to grow by just 0.5% in 2023, down from the agency’s June forecast of 1.5%.
The British “Financial Times” recently published an article entitled “The World Begins to Hate the Federal Reserve”, pointing out that the sharp interest rate hikes by the Federal Reserve in the late 1970s had led to a severe economic recession in developing countries, and Africa and Latin America had experienced a “lost decade” “. Now, the Fed has created yet another potential global debt crisis. The hatred the Fed has incurred is self-inflicted. The U.S. turns a blind eye to the spillover effects of its policies, which tend to backfire on the U.S. itself.
“The estimated data released by the U.S. Department of Commerce recently showed that the U.S. real GDP grew by 2.6% in the third quarter of this year at an annual rate. This figure was mainly driven by exports, of which net exports helped the economy grow by 2.77 percentage points in the quarter. If energy, etc. are excluded With the growth brought about by exports, the U.S. economy has fallen into recession.” Chen Fengying said.
Chen Fengying pointed out that the hastily raising interest rates in major developed economies has weakened their own economic growth momentum and faced the dilemma of containing inflation and avoiding economic recession. At the same time, the dollar continued to rise, triggering massive capital outflows. The debt problem that plagued emerging economies in the past has also become a hurdle for developed countries this year.
“Emerging economies still have difficulties in repaying debt in a global low-interest rate environment, and in the face of a tightening global financial environment, their debt problems are even more significant. In this regard, the data of international institutions are very pessimistic and believe that about 60% of low-income countries have The debt cannot be repaid. At the same time, the ‘interest rate hike’ has also led to an increase in the borrowing and financing costs of euro area countries, and the risk of sovereign debt default in some countries has greatly increased. At present, the global financial vulnerabilities are fully exposed, which directly affects the global demand market and drags down the Global economic outlook. If the world economy does experience a recession, the debtor countries’ problems will be more serious.” Chen Fengying said.
Global macro policy coordination is imminent
World Bank research argues that global central banks should and can tackle inflation without triggering a global recession, requiring coordinated action from policymakers. While maintaining independence, it is necessary for central banks to communicate clearly on their decisions, and central banks in advanced economies should fully consider the spillover effects when tightening monetary policy.
A recent research report by the International Monetary Fund also pointed out that it is necessary for central banks to communicate clearly on their monetary policies, which is crucial to maintaining the credibility of central banks and avoiding unnecessary market volatility. In the context of slowing economic growth, all parties must carry out strong international cooperation to avoid further geo-economic fragmentation and ensure that trade promotes economic growth. Under appropriate circumstances, some emerging market economies that are dealing with a global tightening cycle may consider using targeted foreign exchange intervention and capital flow management measures to reduce financial risks.
At the Group of Twenty (G20) Finance Ministers and Central Bank Governors Meeting held from October 13 to 14, Chinese Minister of Finance Liu Kun said that the current global economic situation is more complex and severe, and all G20 parties should work together to overcome difficulties and Seek common development, promote cooperation, adhere to genuine multilateralism, and promote global development initiatives to take root. Macro-policy coordination should be strengthened to address global challenges such as inflation, food and energy security, and prevent serious negative spillover effects from policy adjustments in some countries.
“To push the world economy out of the crisis and achieve recovery, we must strengthen macro policy coordination, adhere to an open world economy and trade, and avoid trade protectionism.” Chen Fengying said, “Major economies should adopt responsible economic policies, strengthen policy information transparency and Sharing, coordinating fiscal and monetary policy objectives, intensity, and rhythm, controlling policy spillover effects, and avoiding serious impacts on developing countries. At the same time, international economic and financial institutions should also play a constructive role, build international consensus, and enhance policy coordination , ensuring the availability of resources in developing countries and guarding against systemic risks.
“This month, the G20 summit will be held in Bali, Indonesia. This meeting will be a good opportunity for all parties to communicate frankly and enhance the coordination of macro policies. We look forward to this meeting being another meeting after the G20 meeting in London and Pittsburgh. A platform to demonstrate the power of international financial cooperation.” Chen Fengying said.