21st Century Business Herald reporter Wu Bin Shanghai report Before the outbreak of the epidemic, the G7 countries were plagued by low inflation for a long time, and ultra-loose monetary policy became the choice of many countries, and now this era has basically ended.
According to the latest data released on the 22nd, among the G7 countries, the British inflation rate soared by 9.1% in May, winning an unpopular "laurel". In addition, inflation in the United States was 8.6 percent in May, 7.9 percent in Germany, 7.7 percent in Canada, 6.9 percent in Italy and 5.2 percent in France. Japan's April inflation rate was 2.5 percent, which has not yet released Data for May, still exceeds the Bank of Japan's target of 2 percent, even though it is already out of par with the figures.
Wang Youxin, a senior researcher at the Bank of China Research Institute, analyzed the 21st Century Business Herald reporter that the current round of global inflation climbing reversed the trend of low global inflation in the past 20 years. From the perspective of reasons, this is caused by multiple factors such as supply and demand imbalance, liquidity flooding, and supply chain bottlenecks. With the improvement of the global epidemic situation, the recovery of industrial production and the withdrawal of stimulus policies, inflation is expected to gradually fall back from its current highs in the next 2-3 years.
However, compared with the previous low inflation cycle, the future inflation center faces a trend upward shift. Wang Youxin analyzed that this is more caused by structural changes on the supply side, mainly including three major trends, namely population aging, anti-globalization and low-carbon production, which will raise global production costs and trade costs, and promote the general rise in global commodity prices.
Inflation in G7 countries exploded
Although the market has been mentally prepared for high inflation, the inflation data released this week exceeded market expectations.
On June 22, local time, Statistics Canada released data showing that year-on-year inflation rose to 7.7% in May from 6.8% in April, the highest level since January 1983 and well above the 7.3% expected by economists, with petrol, hotel rates and car prices contributing the most to inflation in May.
With price pressures in the economy likely becoming entrenched, Bank of Canada Governor Tiff Macklem desperately needs to quickly pull stimulus out of an overheated economy. The market almost fully absorbed the Bank of Canada's expectations for a 75 basis point rate hike next month, when interest rates will reach 2.25%. The market expects the Bank of Canada benchmark rate to reach 3.50% by the end of the year.
But Canada pales in comparison to the UK's inflation data. Data released by the British National Bureau of Statistics on the 22nd showed that the Uk's May CPI data rose by 9.1% year-on-year, the previous value was 9%, continuing to hit a new high since 1982, and the prices of various commodities from fuel and electricity to food and beverages rose across the board.
Worse still lies, as the UK government has previously raised the energy price ceiling sharply in April and is expected to raise it again in October, putting more pressure on inflation.
The Office for National Statistics said in a statement that it is estimated that UK inflation will continue to rise at historic highs, likely to remain above 9% in the coming months, and then reach a peak of just over 11% in October and possibly fall to a level of about 6.5% in December.
In the face of continued soaring inflation, Huw Pill, chief economist at the Bank of England, hinted that policymakers could take unprecedented action of raising interest rates by 50 basis points if there is further evidence that high inflation is pushing up wages or prices.
This view was echoed by institutions, with both Goldman Sachs and Deutsche Bank betting that the Bank of England would raise rates by 50 basis points in August and September. Goldman Sachs economists Sven Jari Stehn and Steffan Ball said it now appears that most members of the Bank of England's monetary policy committee agree that the barrier to a 50 basis point rate hike at the next meeting is low.
The market's forecast is even further, with the current market expecting three 50 basis point rate hikes from the Bank of England this year and the UK benchmark rate reaching 3% by the end of the year.
However, although the Bank of England does not look dovish anymore, it is still far behind the Fed. The Bank of England has already taken the lead in firing the "first shot" of major central banks in December last year, but the rate hike has always been 25 basis points. The Bank of England raised interest rates by a total of 115 basis points on five occasions, while the Fed came behind, raising rates by a cumulative 150 basis points in just three meetings.
In this regard, Wang Youxin analyzed that in developed economies, the Bank of England raised interest rates earlier, but at present, British inflation is still rising, the effect is limited, and the complaints of the British domestic people about the Bank of England's dovish interest rate hikes have increased. The BoE's rate hike is not as large as the Fed's main reasons for concerns about a rapid downturn in economic growth. After the outbreak of the epidemic, the British economic recovery is not as strong as the United States, resulting in the space and potential for interest rate hikes being constrained, and this year it is facing the impact of geopolitical conflicts, economic growth uncertainty has increased, and the Bank of England is worried that too rapid interest rate hikes will bring greater harm to economic growth. The Bank of England is facing a faster rate hike to contain inflation and a relatively slow rate hike to sustain economic growth.
According to data released by the Office for Statistics in mid-June, Britain's GDP unexpectedly contracted by 0.3% month-on-month in April, falling for the second consecutive month, while the market was expected to grow slightly by 0.1%, which also added to fears of a slowdown.
The Last "Sound of Pigeons"
As inflation in various countries explodes and central banks abandon their dovish stances, the old era of low inflation and ultra-loose monetary policy has basically come to an end.
At present, only Japan is more outlier among the G7 central banks, and while other major central banks have raised interest rates to curb high inflation, the Bank of Japan has been opposed to policy normalization, insisting that the economy still needs support, and Japan's rarely improved inflation rate also needs to be stabilized by larger wage growth.
Therefore, the Bank of Japan still chose to continue to control the yield curve, and the yen continued to plummet. But the BOJ's "doves" may not last long, and as Inflation expectations in Japan rise rapidly, a growing number of analysts and traders believe the BOJ will eventually have to abandon ultra-loose monetary policy.
In addition, the Bank of Japan has another bad news. Even the Swiss National Bank, which has long worked alongside the Bank of Japan on monetary policy, unexpectedly raised interest rates by 50 basis points to -0.25% last week, exceeding all economists' forecasts. The SNB said the tightening monetary policy was aimed at preventing inflation from spreading more widely to Swiss goods and services.
Kristina Hooper, chief global market strategist at Invesco, told 21st Century Business Herald that the SNB's decision marks the basic end of the era of ultra-loose monetary policy, which is the first interest rate hike of the SNB in 15 years. And it is worth noting that Switzerland does not have the same high inflation as other developed Western countries. However, given the high inflation situation in many other countries, the SNB's interest rate hike is motivated by the consideration of preventing a second round of risks.
"For the first time in decades, many central banks have dramatically changed their mindset." In Hoper's view, developed market central banks are moving in the direction of monetary policy normalization in the face of higher, more durable, broader inflation and rapidly rising inflation expectations, and they have to do so.
But such a choice is not without cost. Wang Youxin looked forward to the fact that compared with simple demand-driven inflation, the effect of monetary policy in dealing with mixed inflation will be greatly reduced, which means that inflation may last longer, monetary policy needs to be tightened more intensely, and the economic cost will be higher. In this context, the risk of the economy falling into stagflation increases over time and the implementation of interest rate hikes is also increasing.
For more information, please download the 21 Finance APP