Edited by Ningbo Handy Electrical Co.,Ltd. the Power cord and string light Manufacturer.
While markets are still debating whether the Fed will raise rates sooner than expected at the end of the year, some large economies have already been “forced” to raise rates sooner. Recently, the central banks of Brazil, Turkey and Russia have raised interest rates one after another. Given the dual pressure of economy and COVID-19 epidemic, people are slightly surprised. Market participants expect that, next, due to the expectation of capital return to the US market, imported inflation and other multiple pressures, many countries may follow the interest rate increase.
On the one hand, the epidemic is dragging down the economy, and on the other hand, the policy has to “tighten” under the inflation expectation. Will the global interest rate rise wave take place ahead of schedule and force the Federal Reserve to tighten monetary policy ahead of schedule?
For economies that are “forced” to raise interest rates, it is indeed “either way”. On the one hand, some economies have not seen any improvement in the recent downward economic pressure, and the COVID-19 epidemic is still worsening.
On the other hand, two new “threats” are rapidly emerging. First, the price level “skyrocketed”. The huge fiscal stimulus in the US has had a negative spillover effect, with the size of its massive rescue package exceeding actual demand and reinforcing inflation expectations. The move comes at a time when inflation is at a four-year high, the currency has weakened sharply and fuel prices have risen sharply. While the U.S. fiscal stimulus is not entirely to blame for rising prices in countries like Brazil, it is also an important factor.
The second is that the current recovery in the U.S. economy has led to a rise in long-term Treasury yields, enticing investors out of riskier emerging markets and into dollar assets. Following Brazil’s tightening of monetary policy, other developing countries are likely to raise interest rates to stem capital outflows.
Choose the lesser of two evils. For these emerging markets, inflation rose sharply in the short term, capital outflows fast “threat” and even than economic contraction and outbreak, because the latter is already a “case” for a long time, while the former belongs to the new situation, if not controlled, can lead to financial market collapse, finally a further blow to the national economy.
Higher interest rates, however, could delay recovery in these countries. For these economies, higher interest rates may prove a reluctant balancing act, requiring a temporary check on capital outflows and inflation risks before focusing on recovery as soon as risks receded. In general, even if there is a wave of local or even global interest rate hikes in the future, it is likely to be only a temporary event. Most economies will do whatever they can to increase interest rates as little as possible. As long as inflation and capital outflow pressure cool down, they will try to maintain a relatively loose policy.
For the Fed, the likelihood of a rate rise any time soon remains low. Wall Street widely expects the Fed to remain calm in the wake of new fiscal stimulus, as it remains committed to its “average inflation target” strategy. The Fed will not reduce its monthly asset purchases (quantitative easing) until early 2022. If the US economy overheats, the Fed cannot be ruled out tightening monetary policy ahead of schedule.
As for Chinese assets, the market has little to fear. First of all, compared with other economies in the world, China’s epidemic prevention and control has achieved better results and its economy is moving in a positive direction. The sound fundamentals make Chinese assets have been favored by capital recently. Looking ahead, the positive trend of the Chinese economy will not change and market confidence will be further enhanced. Second, under the current favorable economic situation, China has ample space and time for active monetary policy adjustment. “We have considerable room for monetary policy maneuver. China’s monetary policy has been kept within the normal range, with sufficient tools and a moderate interest rate.” “We need to cherish and make good use of the normal monetary policy space and maintain policy continuity, stability and sustainability,” Yi Gang, governor of the People’s Bank of China, said at a roundtable at the China Development Forum on March 20.
Post time: Mar-23-2021