With the continuation of the outbreak of COVID-19 and the economic fragmentation caused by the distortion in the supply chain, the prospects for global economic recovery have become more complex. In this context, researchers at ANBOUND note that central banks around the world have begun a shift in monetary policy because of higher inflation. Some developed countries, such as Canada, have begun to end quantitative easing, which may be a prelude to a shift in monetary policy by central banks around the world. However, although the market has anticipated that the Federal Reserve will start to withdraw from easing in November, the situation that central banks are facing currently is not completely certain. How to deal with the changes in inflation remains a challenge for central banks and monetary policy in the future may gradually diverge, which brings more uncertainty.
Judging from the current situation, the rise in the level of inflation has become a reality. Although most central banks insist on the ‘temporary’ nature of inflation, at the same time, more and more official institutions and market participants are beginning to realize that the problem of inflation is not retaliatory growth in demand, but also constrains on the supply side caused by distortions in the global supply chain, thus making price changes more difficult to predict. This adjustment will take longer and the impact on the economy will be more lasting and it has also forced central banks to consider how to deal with changes in long-term inflation.
As New Zealand, Canada, Australia, and other countries begin to withdraw from monetary easing, it means that the policy shift in advanced economies has begun. But for now, this shift is not synchronized, and the differentiation of the economy will lead to a divergence of monetary policy among the major economies. For the Fed, which dominates global monetary policy, with the United States economic growth in the third quarter lower than expected, the certainty of its monetary policy adjustment in November is still strong to cope with high inflation. Data show that the Core PCE Price Index in the United States rose 3.6% year-on-year in September, the highest level in nearly 30 years. But what worries the market is that stagflation is more and more likely to happen in the future when the economy slows down. Fed Chairman Jerome Powell has previously said that bond purchases could end by middle of 2022, but if concerns about inflation grow and shrink faster than expected, it could open a window for interest rate hikes. This sign of an accelerated pace of tightening has added to market concerns about whether the Fed can accurately grasp changes in the economic situation and promote the pace of monetary policy change.
At Present, both the European Central Bank and the Bank of Japan have decided to keep their monetary policy unchanged, which makes the monetary policy of developed economies begin to distance themselves. Both the European Union and the 19-nation eurozone expanded by a quicker-than-forecast 2.2% in the third quarter, the fastest pace in a year and is just beginning to recover from the pandemic. However, driven by energy prices, eurozone’s inflation rose to 4.1% in the year through October, more than double the European Central Bank (ECB) ’s target. The disconnect between the economy and inflation has made the ECB more cautious. In Japan, annual inflation is expected to be only 0.9%, while economic growth is expected to achieve an annual growth rate of 3.4%. This also means that Japan is more willing to maintain its existing monetary policy to continue promoting inflation to achieve its policy goals.
In emerging markets countries, the central banks of Russia, Brazil and Mexico have begun to raise interest rates in response to the spillover effect of soaring inflation and monetary easing in advanced economies. For China, under a prudent monetary policy, its economy slowed significantly in the third quarter, while inflation continued to remain at a low level, indicating that overall demand has not yet effectively recovered. China may have the possibility of structural monetary easing in the future to achieve economic stability. The differences in policies among countries and the divergence between economies indicate that the global economic recovery has become more complex, and uncertainties are still increasing.
What is even more worrying is that the wait-and-see attitude of major central banks in dealing with inflation and economic recovery has led to fears that central banks will not be able to adjust monetary policy effectively. Tightening policies too quickly may bring about a contraction in economic demand and lead to an economic downturn, while continuing to promote easing could lead to hyperinflation with disastrous consequences. A survey by Deutsche Bank shows that a considerable number of investors think that the monetary policy of the Fed and the ECB is too loose, while the Bank of England is at greater risk of making mistake because of its policy hawks. On the one hand, these concerns stem from the slow response of Europe and the United States to the inflation problem, and on the other hand, they are worried that the central bank will act too hastily in the future.
The monetary policy adjustment brought about by the COVID-19 pandemic is unprecedented in pace and intensity, and its impact on the economy and capital markets is also unprecedented. As far as the policy shift of tapering quantitative easing becomes more and more imminent, the “overshoot” in which there is no basis to go on or retreat may be more in line with the law of the policy cycle and the economic cycle, but the possible panic caused by reduction of easing will also become unpredictable. On the face of it, these worries are a lack of confidence in the monetary policy of the central bank; at a deeper level, it also shows that the current monetary policy adjustment is very difficult, and it is difficult to adapt to the differentiated and complex situation of economic recovery.
Final analysis conclusion:
Although more and more central banks have joined the “shift” of monetary policy, the differentiation of economy and the change of inflation have also led to the differentiation of monetary policy in major economies. This divergence makes it more difficult for economies to implement monetary policy and reflects the complex and volatile prospects of the global economy.
