Raising interest rates & not raising interest rates in the world economy

The U.S. dollar spreads over the global emerging markets gritted their teeth

Raising interest rates & not raising interest rates in the world economy

China Business News.com.cn on July 23, the Bank of Russia announced an interest rate decision. In response to soaring inflation, the Bank of Russia raised the benchmark interest rate by 100 basis points to 6.5% as scheduled. It is worth noting that this rate increase is also the largest since the 2014 ruble crisis. After this interest rate hike, the Central Bank of Russia has raised interest rates four times during the year for a total of 225 basis points. The reasons for these four interest rate hikes are the same: I hope to prevent domestic inflation from rising continuously. According to official statistics, Russia’s annualized inflation rate was 6% in May and rose to 6.5% in June, higher than the expectations of the regulatory authorities and close to the peak of the past five years.

The interest rate hike in Russia is not an isolated phenomenon. On July 14, the Chilean central bank approved a 25 basis point rate hike to 0.75% by unanimous vote. This is also the country’s first rate hike since January 2019. The Central Bank of Chile expects that the country’s economic growth will reach 9.5% this year, while inflation will exceed the policy target of 2% to 4%. On June 24, the Bank of Mexico unexpectedly raised the benchmark interest rate by 25 percentage points to 4.25% in response to what policymakers previously called “temporary” inflation. On June 16, the Brazilian Central Bank raised the benchmark lending rate by 75 basis points to 4.25%. In order to curb rising inflation expectations, this is the third consecutive interest rate hike in Brazil since March this year. The governor of the Czech Central Bank said a few days ago that the Czech Central Bank should raise interest rates again at its August 5 policy meeting, and may continue to tighten monetary policy afterwards.

However, developed countries represented by the United States, Europe, and Japan still adhere to extremely loose policies, which have stimulated the prices of commodities and agricultural products in the international market to rise sharply since April last year. Coupled with the frequent occurrence of extreme global climates this year, emerging markets have suffered a lot. Large imported inflationary pressures. The International Monetary Fund (IMF) said in early July that if the United States provides more financial support, then this may further increase global inflationary pressures. However, the Fed’s interest rate resolution announced on July 29 shows that the Fed will remain on hold and formally discuss the possibility of reducing the scale of bond purchases (Taper). This shows that the Fed maintains a loose monetary policy. Just as Fed Chairman Powell emphasized, raising interest rates is still a distant matter, and believes that US inflation will continue to rise in the next few months.

As the United States is the world‘s largest economy and the U.S. dollar is the world‘s largest mobile currency, rising inflation in the United States will inevitably be transmitted to the global market. The IMF stated in a report in early July that other countries are facing the pressure of rising commodity and food prices. In particular, global food prices are currently at their highest levels since 2014, which has caused millions of people to face food insecurity. risk.

From the perspective of the continuous flow of US dollars into the market and the promotion of global commodity and agricultural prices, the more the United States adheres to the loose policy, the more the world faces inflationary pressures. Especially for emerging markets and developing countries, imported inflation is also rising. In addition to the divergence of COVID-19 vaccination rates, inflation is also a major factor leading to the obvious economic divergence between developed economies and developing countries. In its latest report on July 27, the IMF lowered its growth forecast for emerging markets and developing economies this year by 0.4 percentage points to 6.3%. The IMF believes that emerging markets and developing economies are facing the dual impact of the worsening of the epidemic and the tightening of the external financial environment, and economic recovery may be hit hard and will drag down global economic growth. At the same time, the IMF raised the economic growth forecast for this year’s advanced economies by 0.5 percentage points to 5.6%. The forecasts for the United States, the United Kingdom, Canada, and Italy were raised significantly, while France and Germany remained unchanged.

The increasingly serious consequences of economic differentiation between developed and developing regions will inevitably lead to intensification of contradictions between different regions. In the post-epidemic period, this in turn has further widened the economic gap between developed and developing countries. Judging from historical experience, every major human crisis is an accelerator for the widening gap between the rich and the poor, and the global new crown epidemic crisis is no exception.