Author 丨 Wu Bin
Editor 丨he Jia
Figure Source 丨 Figure worm
After the annual meeting of the Jackson Hole central bank, the hawks in the European and American central banks continue to attack the city, the "dove" has almost disappeared, and the ECB's "violent interest rate hike" next week may be on the string.
On August 29, local time, the latest data from the eurozone's currency market showed that the probability of the ECB raising interest rates by 75 basis points in September has climbed to 67%. In contrast, investors last week had expected the ECB to raise rates by another 50 basis points on September 8. ECB regulators Klaas Knot, Robert Holzmann and Martins Kazaks, among others, have expressed their support for at least a 50 basis point hike in September and a 75 basis point hike. Boosted by the expectation of a strong interest rate hike by the European Central Bank, the euro also returned to parity above the dollar on the 29th.
Oxford Economics economist Matezz Urban told 21st Century Business Herald that the ECB is sending a strong signal that they will try to reduce inflation to the target level, and this hawkish sentiment is expected to continue for a certain period of time.
And the "violent interest rate hike" anti-inflation is likely to come at the expense of the economy. Kristina Hooper, chief global market strategist of Invesco, told the 21st Century Business Herald that inflation in the euro area is very serious, and the high inflation momentum is difficult to contain, and the euro area economy is already under very huge pressure. Given that much of the eurozone's inflation is not demand-driven and will be more difficult to contain, the ECB may "stifle" economic growth before "containing" inflation.
In any case, the former "doves" of the European Central Bank has fully reflected the seriousness of the current inflation situation, and the central banks of developed countries in Europe and the United States may have no choice.
The ECB may raise rates by 75 basis points next week or "violently"
Faced with high inflation not seen in decades, the European Central Bank last month announced a 50 basis point increase in three key interest rates, including a deposit mechanism rate hike to 0%, ending the era of negative interest rates.
Inflation in the eurozone reached an all-time high of 8.9 percent in July and more than four times the ECB's 2 percent target, official data showed, and inflation is still likely to rise further.
It also means that the Eurozone inflation data for August released on Wednesday and the ECB's new forecast will be key to determining the magnitude of next week's rate hike. Economists expect CPI to grow at 9 percent year-over-year in August, up from 8.9 percent in July. If the August CPI exceeds expectations again, the ECB's determination to raise rates sharply at its September 8 meeting will be stronger, and the 75 basis point hike will be more realistic.
What needs to be noted is that even if the August inflation data has not yet been released, judging from the recent speeches of a series of officials, it seems that vigorous interest rate hikes to fight inflation seem to have become the only option for the ECB at the moment. Is there a 50 basis point hike or 75 basis points next week?
ECB governing council member Klaas Knot has already taken a stand, supporting a rate hike of up to 75 basis points at next month's meeting. "The inflation problem in Europe is very serious at the moment, and we need to raise interest rates every 6 weeks until the inflation rate stabilizes at around 2%." Bot Of Austria Governor Robert Holzmann also said a 75 basis point rate hike should be considered at the September meeting.
Despite the imminent recession, prioritizing the fight against inflation has become the consensus of almost all officials. EcB Executive Isabel Schnabel said the likelihood and cost of current high inflation becoming entrenched in expectations is troublingly high, and the impact on the economy will be even more severe if inflation expectations are off anchor.
"In this environment, central banks need to take strong action and be steadfast in preventing people from starting to doubt the long-term stability of our fiat currency." Schnabel also acknowledged the risk of a recession, but "even if we enter a recession, we basically have no choice but to continue our path of normalization."
Similarly, Francois Villeroy de Galhau, a member of the ECB's Governing Council, warned that policymakers must be determined to fight record inflation so as not to be forced to take "unnecessarily cruel" interest rate actions in the future.
According to Martins Kazaks, a member of the ECB's Governing Council, the eurozone is highly likely to fall into recession, but this alone is not enough to reduce inflation, and the ECB should choose to raise interest rates sharply next month. "We should be open to discussing whether to raise rates by 50 basis points or 70 basis points. As it stands, it should be at least 50 basis points. ”
Overall, the ECB's anti-inflation policy has been decided. Urban told reporters that despite the imminent risk of recession, some ECB officials have recently called for a strong interest rate hike. Given that inflation remains the only concern of the ECB for now, another strong rate hike is expected at the September meeting. In addition, the ECB has also taken note of the weakness of the euro against the dollar, and the depreciation of the euro has also added fuel to the inflation problem.
By all indications, stagflation may become an inevitable outcome for Europe. JPMorgan expects overall inflation in Europe to reach more than 10% by the end of the year, and the ECB may also be forced to continue to raise interest rates. Affected by soaring gas prices and further interest rate hikes by the European Central Bank, the eurozone economy will fall into a "deep recession" by the end of the year.
Former US Treasury Secretary Somers expressed pessimism about the current predicament of the ECB, and ECB President Christine Lagarde's work is much more difficult than Powell's given inflation in the euro area, energy price shocks and geopolitical issues. "Europe will have a tough road, and I suspect the ECB will raise interest rates more than the market currently expects, and the recessionary pressures are now heavy."
Inflation is more than "dove" hard to find
In fact, with Fed Chairman Powell issuing the strongest "eagle" of monetary tightening at the annual meeting of the Jackson Hole central bank last week, the priority of anti-inflation has been further raised, and the "doves" in the European and American central banks have almost disappeared.
From the Federal Reserve to the European Central Bank, the Bank of England, the Bank of Korea... The world's major central banks have sent a blunt and unified message about the need to curb inflation: one voice declaring that inflation is broad-based, will remain high, and requires strong action.
Gopinat, first vice president of the International Monetary Fund, believes that the challenges facing central bankers in weighing employment, inflation and growth will become even more daunting in the coming years as the world struggles to correct job markets and supply chains while price pressures continue to exist. Given the risk that inflation becomes entrenched, major central banks need to consistently maintain a hardline stance, despite the possible costs, Gopinat said.
It should be noted that driven by the Fed's aggressive interest rate hike policy, the strong dollar has exacerbated inflation in many open economies around the world, and many countries' currencies have suffered sharp depreciations, and the strong Fed has put more pressure on these countries.
For example, the Bank of Korea was one of the first central banks to abandon monetary stimulus during the pandemic. Since august last year, the Bank of Korea has raised its benchmark interest rate by 200 basis points to 2.5 percent. Bank of Korea Governor Lee Chang-yong said the bank must continue to raise interest rates until inflation falls. At the same time, he acknowledged that the Bank of Korea is likely to be unable to stop tightening policies before the Fed turns.
"We are now independent of the government, but we are not independent of the Fed." Lee Chang-yong said helplessly.
In fact, among the central banks of developed countries, almost only the Bank of Japan is still adhering to a dovish policy. Bank of Japan Governor Toshihiko Kuroda believes that Japan's economic situation is different from that of Europe and the United States. "It feels a bit magical that Japan's inflation rate is now at 2.4 percent, but it's almost entirely due to international commodity price increases, energy and food, and Japan's inflation rate could turn lower by the end of this year and next year." Therefore, until wages and prices rise in a stable and sustainable manner, we have no choice but to continue to ease monetary policy. ”
But overall, vigorously raising interest rates and fighting inflation is still the main theme of the world. Hooper told reporters that numerous central banks are taking action, and economic data from some countries may indeed be worrying. Coupled with increased geopolitical risks and the likely downward revision of corporate earnings expectations, the market is likely to experience more volatility in the future. For investors, all they can do is maintain a long-term perspective and diversify their allocation of equities, fixed income and alternative assets.
On the other hand, although most developed central banks have now shown their "eagle claws" and chosen to use "interest rate hikes in front" to fight inflation, in the long run, aggressive interest rate hikes will eventually come to an end. In Urban's view, the deteriorating outlook will gradually resurface the dovish faction in the ECB and eventually lead to a pause in rate hikes, which could happen as early as early 2023. Record energy prices could also allow inflation to persist longer, delaying the ECB's shift in monetary policy.
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This issue is edited by Xueying Liu, Intern Wu Ziyao