Economic Watch
Are we ready for a new inflation cycle?
Countries must first maintain their own financial stability, and “sweep the snow at their own door”; one of the important ways to build regional financial resilience is to increase the use of local currencies and reduce the overall dependence of emerging markets on major reserve currencies.
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"What worries me the most and can't sleep at night is the interest rate hike in developed countries and the consequences - the capital outflow in the Asian region." On the morning of April 22, the Governor of the Bank of Thailand, Setap, communicated via video. line, said at the Boao Forum for Asia Annual Conference 2022.
Setap's concerns are well-founded.
When the Fed enters a rate hike cycle, emerging markets tend to face multiple pressures.
Historically, when the situation was serious, it triggered the Latin American debt crisis, the Asian financial crisis, and the Turkish currency crisis.
The last consequence in Asia was the Asian financial crisis in 1997, when the Thai monetary authorities were forced to abandon the fixed exchange rate system and the currency depreciated by more than 30%.
A new round of inflation cycle is starting, how should the global economy respond?
How should central banks coordinate monetary policy?
Are we ready?
'We are in a new era of inflation'
Since 2021, the prices of commodities such as oil and natural gas have skyrocketed, food prices have risen, housing prices in many countries have risen, and the conflict between Russia and Ukraine has further pushed up the prices of food and energy products. Inflation risks threaten global economic and financial stability.
Under such circumstances, developed countries such as the United States, the United Kingdom, and Canada and some emerging economies have all entered the track of raising interest rates.
Take the United States for example.
Fed Chairman Jerome Powell recently hinted at a possible 0.5 percentage point rate hike at its May meeting, saying a similar rate hike may be needed later to bring down inflation.
And just last month, the Fed just decided to raise interest rates by 25 basis points from near zero.
If the Fed raises interest rates again in May, the 50 basis point rate hike created will be the first since 2000.
"We are in a new era of inflation." Carstens, general manager of the Bank for International Settlements, pointed out that the rise in inflation in the past year has become a global phenomenon. It has exceeded 5%, and inflation in more than half of emerging market economies is above 7%.
What is the reason for the rise in inflation?
Carstens summed up three points: First, global aggregate demand has rebounded strongly. Compared with economic recovery after previous crises, the global economic recovery after the new crown pneumonia epidemic has been faster, especially in developed economies.
Second, demand is more inclined to goods than services, especially the slow recovery of demand in the service industry that needs to contact customers.
The third is the slow response of supply in the face of rapidly rebounding demand, which is reflected in supply bottlenecks, delivery delays, rising transportation costs and shortages of key production inputs.
"For these reasons, we should not expect inflationary pressures to ease anytime soon." Carstens noted that new inflation drivers have emerged.
Since the outbreak of the Russian-Ukrainian conflict, the prices of food, oil and many other commodities have soared as supplies dried up.
He cautioned that "we have reason to be vigilant" amid signs that inflation expectations are spiraling out of control.
Frankel, chairman of the board of directors of the Thirty Group, believes that the global economy has now entered a new inflation cycle.
The challenges faced by the global economy today, such as supply chains and epidemics, are not present in past inflation cycles, and unlike the past, the real problem now lies in the financial market, because financial markets have spillover effects.
Frankel has served as the chairman of commercial banks such as JPMorgan Chase and Merrill Lynch International, and also served as the governor of the Central Bank of Israel. He has a good understanding of the risk spillovers in the global financial market.
He analyzed that when the inflation rate is very high, it will gradually be transformed into prices, the price level will be transformed into inflation expectations, and inflation expectations will finally be transformed into inflation, and inflation will be transformed into the spillover effect of the financial market and foreign exchange market.
It is necessary to "sweep the snow before the door" and to advocate multilateral cooperation
This kind of situation has occurred many times in history because of the inadequacy of inflation control, leading to the global spillover of financial problems.
How can I prevent this from happening again?
Setap believes that countries must first maintain their own financial stability and “sweep their own doorsteps”; the second is to build regional financial resilience. One of the important ways is to increase the use of local currencies and reduce the overall impact of emerging markets on major economies. Reserve currency dependencies.
Setap cited Thailand as an example. Thailand has adopted the framework of settlement in local currency more. Between Thailand and Malaysia, and between Thailand and Indonesia, the use of local currency accounts for 63%.
In addition, it can also promote regional retail connections, Thailand is establishing the first fast payment system with Singapore, and 5 ASEAN countries including Malaysia, Indonesia, Laos, Vietnam, Cambodia will also join in order to promote and enhance the use of local currency ratio, thereby enhancing the financial resilience of the region.
Yu Weiwen, president of the Hong Kong Monetary Authority of China, predicted that the current U.S. inflation level has hit a 40-year high, and the Federal Reserve will take more aggressive tightening measures.
Once the Fed raises interest rates, the impact on Asian markets will be unknown, but the spillover effect on Asia will definitely be very high.
Therefore, it is necessary to pay close attention to the impact of the Fed's interest rate hike on each country and region itself, especially the impact on the real estate industry and the entire financial system.
"We must clear the snow in front of our house and clean up our house, and we are ready for this." Yu Weiwen said that Hong Kong's economy has just recovered from the epidemic, and the Fed's interest rate hike will increase the pressure on Hong Kong's economy.
In this regard, Hong Kong, China has made some preparations, not only in terms of the macro economy, but also must have sufficient foreign exchange reserves as a buffer, and the banking system also needs to have sufficient liquidity.
"We are facing local problems, as well as regional problems and global problems, which need to be solved at every level, and the only way to solve global problems is through global mechanisms." Frankel said at this Boao Asia The forum called for, "We need an overall plan to deal with global issues, so policy communication, coordination and cooperation are particularly important." Setap also believes that financial safety nets within the region should be developed and used.
In this regard, the cooperation between Asian countries, especially China and ASEAN countries is relatively close.
After the US financial crisis in 2008, the willingness of Asian countries for financial cooperation was further strengthened. In 2010, the Chiang Mai Initiative Multilateral Mechanism was officially launched. In 2012, the Chiang Mai Initiative Multilateralization Mechanism was expanded, and the size of its reserve fund increased to 240 billion US dollars.
In March 2021, the Special Amendment to the Chiang Mai Initiative Multilateralization (CMIM) Agreement, signed by ASEAN, China, Japan and South Korea (10+3) finance ministers and central bank governors, and the President of the Hong Kong Monetary Authority of China, came into effect.
In Setap's view, this round of Fed rate hikes has fully conveyed a message to the market.
Emerging markets have much stronger buffers, which also mitigates the impact of rate hikes in advanced economies.
Asia can also take further steps to enhance financial stability within the region.
"Fortunately we are ready for this"
"Obviously there will be rising inflation, and we will expect it to remain for a period of time, but I am very confident that this can be absorbed by us." Dean of the National Institute of Financial Research at Tsinghua University and former deputy director of the International Monetary Fund President Zhu Min believes that in the face of the current global inflationary pressure, China and other Asian countries are generally able to manage inflation expectations well.
"Luckily we're ready for that and there's a solid buffer overall."
Zhu Min believes that there are still many tools in China's monetary policy toolbox, and there is a lot of room for interest rate levels.
In fact, China's monetary policy has been deployed ahead of schedule, and the prudent monetary policy has increased support for the real economy.
Since December 2021, the 1-year and 5-year+ LPRs have fallen by 15 and 5 basis points, respectively.
As of the end of March this year, the scale of broad money (M2) and social financing increased by 9.7% and 10.6% respectively, a significant increase from the end of the previous year.
Yi Gang, Governor of the People's Bank of China, also attended the annual meeting in the form of video and made a keynote speech.
He pointed out that the current international situation is full of uncertainties, and geopolitical tensions have further exacerbated global inflationary pressures.
There have been some fluctuations in China's financial market recently. This is due to both external shocks and internal factors such as the spread of the domestic epidemic and the increasing downward pressure on the economy.
In 2022, the People's Bank of China will hand over the total profit to the central government to exceed 1 trillion yuan in accordance with the law, which will be mainly used for tax refunds and transfer payments to local governments.
Yi Gang pointed out that the balance of profits mainly comes from the accumulation of profits of the People's Bank of China in the past few years, which is equivalent to increasing fiscal expenditure by 1% of the total GDP.
He also said that the central bank played the role of a direct tool for structural monetary policy, and vigorously supported key areas and weak links.
Monetary policy focuses on supporting small, medium and micro enterprises and vulnerable groups affected by the epidemic.
At the end of March, the balance of inclusive small and micro loans was 21 trillion yuan, a year-on-year increase of 25%.
Recently, the People's Bank of China further introduced 23 policy measures to support the real economy, including providing support to vulnerable groups affected by the epidemic.
In his view, a suitable monetary and financial environment supports the stable start of China's economy in 2022.
In the first quarter, China's GDP increased by 4.8% year-on-year, and the growth rate has rebounded from the fourth quarter of last year.
Prices remained within a reasonable range. In the first quarter, the CPI rose by 1.1% year-on-year, and the PPI rose by 8.7%.
"The primary task of China's monetary policy is to maintain price stability." Yi Gang believes that this year, food production and energy supply are very important to price stability.
Financial services attach great importance to agricultural production, as well as the production and import of important energy sources such as coal, oil, and natural gas.
As long as food production and energy supply are ensured, prices will stabilize within a reasonable range.
Yi Gang said that China will continue to implement a prudent monetary policy, and will comprehensively use a variety of tools to provide more support for small, medium and micro enterprises and increase support for the real economy.
China Youth Daily, China Youth Daily reporter Wang Lin Source: China Youth Daily