Historically, whether the Fed is in the process of exiting quantitative easing or raising interest rates, due to tightening liquidity, narrowing interest rate spreads, and rising risk aversion, emerging economies have experienced relatively common capital outflows and readjustment of asset allocation. .
The Fed will announce its latest interest rate decision on June 15. Previously, in the Federal Open Market Committee (FOMC) statement released on May 25, the Fed raised the target range of the federal funds rate by 50 basis points to 0.75%-1%, and expected that it would be appropriate to continue to increase the range. At the same time, the committee decided to start the reduction of the balance sheet from the beginning of June 1.
Since the announcement of debt reduction in November 2021, the launch of interest rate hike boots in March 2022, the first rate hike of 25 basis points, and the start of balance sheet reduction in June 2022, the Fed has tightened its monetary policy with increasing magnitude and intensity. The adjustment is mainly due to the continuous “high fever” of inflation, from “temporary” to “structural” and “persistent”.
Yang Panpan, deputy director of the International Finance Research Office of the Institute of World Economics and Politics of the Chinese Academy of Social Sciences, pointed out in an interview with a reporter from the 21st Century Business Herald that from the perspective of the reasons for pushing up inflation, whether it is the United States or other countries, the role of monetary policy in curbing inflation is relatively Small, supply-side factors are still the most important variable affecting inflation.
“From the current situation, the U.S. inflation rate in 2022 is unspeakable.” Yang Panpan explained that on the one hand, the problem of supply chain disorder will continue in 2022. Under the impact of the new crown epidemic, the problem of supply chain disconnection has not been fully alleviated. In addition, countries have put more emphasis on supply chain security and supply chain backup construction. During the policy change process, the efficiency of the supply chain has declined, and the supply chain has been subject to medium and long-term constraints. On the other hand, the geopolitical conflict situation has not yet seen signs of easing, the prices of international bulk commodities such as energy and food remain high, and global inflation continues to be under pressure.
In the context of high inflation pressure and the Fed raising interest rates, whether the US economy will fall into “stagflation” has become the focus of the market.
Wang Jinbin, deputy dean of the School of Economics at Renmin University of China, told the 21st Century Business Herald that the U.S. CPI has risen by more than 8% year-on-year for three consecutive months, and it is expected to remain high in the future. At the same time, the U.S. GDP contracted by 1.5% in the first quarter of this year. If the second quarter remains negative, it can be technically defined as a recession. However, the Fed’s previous forecast for the U.S. economic growth this year was around 2.8%. From this point of view, there is only an “inflation” component in the US economy, and there is no obvious sign of “stagnation” yet. In the follow-up, if the Fed’s monetary policy adjustment is “excessive” and significantly inhibits aggregate demand, the risk of the US economy falling into “stagflation” will further increase.
In addition to the United States, other countries are also generally facing the dual pressures of rising inflation and economic downturn. However, for some emerging economies with fragile economic fundamentals, they also need to deal with the problems of capital flight, currency devaluation, and rising debt repayment pressure in the context of the Fed raising interest rates.
“As long as the U.S. dollar’s influence as an international reserve currency continues, every time the Fed starts the interest rate hike cycle, other countries will inevitably be affected by spillovers, and the specific impact depends on the strength of their ability to resist risks.” Wang Jinbin said.
Inflation is running high
Inflation has continued to rise in many countries around the world, reflecting broader and persistent price pressures.
Among emerging economies, the inflation rate of major Latin American economies such as Argentina, Brazil, Chile, and Peru has been above the upper limit of the official target range for several months. Judging from the latest data, Argentina’s annualized inflation rate reached 58% in April, the highest level since January 1992, and the year-on-year growth rate for November has exceeded 50%; Brazil’s annualized inflation rate in May reached 11.73%, a record high from March The historical high of 12.13% (since March 2003) has retreated, but the inflation rate has remained in double digits for the ninth consecutive month; Chile’s annualized inflation rate reached 11.5% in May, up from 10.5% in April, For the highest level since July 1994; Peru’s annualized inflation rate reached 8.09% in May, higher than 7.96% in April, the highest level since July 1997.
In Asia, the inflation rate in India, Indonesia and other countries also maintained an upward trend. India’s May annualized inflation rate fell to 7.04 percent from an eight-year high of 7.79 percent in April, though it has been above the RBI’s official target ceiling of 6 percent for five consecutive months; Indonesia’s May annualized inflation rate It rose to 3.55% from 3.47% in April, the highest level since December 2017.
In the Middle East, Turkey’s annualized inflation rate reached 73.5% in May, the highest level since October 1998, in sharp contrast to the 16.6% inflation rate in the same period last year.
Among advanced economies, the U.S. annualized inflation rate reached 8.6% in May, the largest increase since December 1981, up from 8.3% in April and 8.5% in March. Among the specific components, energy prices rose by 34.6%, the largest increase since September 2005; food prices rose by 10.1%, the first time the increase has exceeded 10% since March 1981. The annualized inflation rate in the euro zone reached a record high of 8.1% in May.
Among the G20 countries, according to the latest data, the inflation level of four countries, Turkey, Argentina, Russia and Brazil, is much higher than that of other countries, ranking in the top four; there are five countries with an inflation rate lower than 5%, of which China has an annualized inflation rate in May. The inflation rate is 2.1%, and the inflation rate in other countries is 5%-10%.
Central banks tighten monetary policy
In response to high inflationary pressures, many countries around the world have successively launched interest rate hike cycles. Since June, there have been new developments in monetary policy in both developed and emerging economies.
Among developed economies, the European Central Bank announced on June 9 that it would stop net asset purchases from July 1 and plan to raise interest rates by 25 basis points in July, paving the way for the first interest rate hike in more than a decade.
Among Latin American countries, the Central Bank of Peru raised the benchmark interest rate by 50 basis points to 5.5% on June 9, and the Central Bank of Chile raised the benchmark interest rate by 75 basis points to 9% on June 7. In Asia, India’s central bank raised its benchmark interest rate by 50 basis points to 4.9% on June 8, raising borrowing costs for the second time in a row this year after raising interest rates by 40 basis points on May 4.
Among emerging economies, unlike major economies in Latin America, which have maintained continuous interest rate hikes, due to political factors, Turkey’s monetary policy has previously cut interest rates in a continuous “counter-cyclical”. Turkey’s central bank has kept its benchmark interest rate unchanged for five consecutive months since January. Against this background, the Turkish lira has fallen by 44% against the US dollar last year, and has fallen by about 20% since January this year.
In addition, in the context of geopolitical conflicts intensifying sanctions against Russia by Western countries and impacting the country’s financial market, the Russian central bank’s monetary policy is also hovering between interest rate cuts and interest rate hikes. Judging from the latest developments, Russia’s inflation rate reached 17.1% in May, down from 17.8% in April and more than four times the central bank’s official target level. In view of inflation, economic, external risks and other factors, the Central Bank of Russia cut the benchmark interest rate by 150 basis points to 9.5% on June 10. On February 28, in response to the volatility of the stock market and foreign exchange market caused by external risks, the Russian central bank raised interest rates sharply by 1,050 basis points.
Wang Jinbin said that although countries face different policy environments and different levels of inflationary pressures, on the whole, the current inflation levels in most countries are far beyond the target range set by the central bank, superimposed on the background of the Federal Reserve raising interest rates, and many economies around the world will be in the The rate hike cycle is the general trend.
Push up global debt risks
Since March 2021, Brazil has fired the first interest rate hike among the world‘s major economies, kicking off the interest rate hike cycle. Since then, emerging economies have started to raise interest rates one after another.
Xiong Aizong, deputy director of the Global Governance Research Office of the School of International Relations of the Chinese Academy of Social Sciences, told the 21st Century Business Herald reporter that emerging economies started raising interest rates mainly to curb high inflation. Monetary policy, emerging economies will face greater pressure to raise interest rates in the future.
“From a historical point of view, the financial markets of emerging economies have been significantly affected by the Fed’s withdrawal of quantitative easing or interest rate hikes.” Yang Panpan said that due to tightening liquidity, narrowing interest rate spreads, and rising risk aversion , emerging economies experienced relatively common capital outflows and readjustment of asset allocation, which brought exchange rate depreciation and substantial adjustment of domestic asset prices represented by stock market indexes.
Judging from the timing of the Fed’s tightening of monetary policy, Yang Panpan said that the Fed has been discussing reducing the bond purchase plan since June last year, and officially implemented the bond purchase plan in December, and gradually advanced the timing of interest rate hikes. The balance sheet reduction plan was further formulated. Many tightening measures did not bring about a “taper panic” like the previous round, and the prices of currencies and assets related to emerging markets did not experience major turbulence.
The reason, Yang Panpan believes that there are two main aspects.
On the one hand, the Fed communicated more fully with the market and emerging economies responded in advance. The last time the Fed withdrew from quantitative easing and raised interest rates for the first time in history, the market did not know what the consequences of the tightening would be. This uncertainty was transmitted through the expected channel and dominated market sentiment and financial market trends. Specifically, when the Fed discussed the reduction of quantitative easing (May-December 2013) and interest rate hikes (January-December 2015), the major currencies of emerging economies depreciated, and stock market prices fell. When easing was tapered (Dec 2013-October 2014) and interest rates were raised (after December 2015), exchange rates and stock prices mostly started to recover. During the current round of the withdrawal of the quantitative easing policy in developed economies, the market and the governments of emerging economies have a clearer reference to the historical exit path, and the Federal Reserve’s foreign policy communication and guidance on expectations are also more clear.
“In this context, although the exit path of monetary policy in this round has also undergone several rounds of adjustment, it is more carried out in the form of small steps and fine-tuning, and policy tightening is easier to predict. Market volatility has also been reduced.” Yang Panpan said.
On the other hand, the fundamentals of emerging economies themselves have improved relative to the previous round. Judging from the fundamentals of major emerging economies including ASEAN countries and BRICS countries, although the fiscal deficit has increased due to epidemic-related reasons, inflation and international payments have improved. The economic fundamentals of most economies Enough to deal with the tightening effect of loose monetary policy in advanced economies.
However, it should be noted that due to the recent conflict between Russia and Ukraine, the international commodity market has continued to fluctuate, and the rise in commodity prices will be transmitted to emerging market countries, pushing up the inflation level of major emerging economies. “For those countries that rely on commodity imports, current account balances will also deteriorate, weakening the economic fundamentals of emerging economies in response to monetary policy tightening,” added Yang Panpan.
Zhao Xueqing, a researcher at the Bank of China Research Institute, told the 21st Century Business Herald that the U.S. dollar has always been at the core of global liquidity and capital supply and demand. With the tightening of the Federal Reserve’s monetary policy, the dollar’s liquidity has accelerated to “escape”, and the debt risks in emerging markets will be greatly reduced. rising.
This judgment is mainly based on the following data: As of the end of 2021, the scale of emerging market debt reached 95.7 trillion US dollars, a record high, accounting for about 247.8% of GDP. Among them, government debt reached 23.9 trillion US dollars, an increase of 34% compared with before the epidemic, and the proportion of GDP rose from 53.6% to 63.6%. Over the next five years, nearly $3 trillion of dollar-denominated debt (bonds and loans) in emerging markets will come due, of which $284.4 billion will be due in government dollar-denominated debt.
From a country-by-country perspective, Zhao Xueqing pointed out that Pakistan, Sri Lanka, Ghana and other countries have excessive sovereign debt, while Poland, Turkey, Egypt and other countries have been hit hard by the conflict between Russia and Ukraine and face greater debt risks. At the same time, affected by monetary policy and geopolitical conflicts, international capital has accelerated out of emerging markets, and the domestic bond markets of some emerging economies with a high degree of foreign participation will also experience relatively large fluctuations. For example, in the local currency bond market of Peru, South Africa, Czech Republic, Malaysia, and Colombia, the proportion of foreign ownership is as high as 51%, 28%, 27%, 26% and 25% respectively.
(Author: Shu Xiaoting Editor: He Jia)