Recently, many central banks have announced interest rate decisions. Major developed economies such as the United States, the United Kingdom, and Japan continue to maintain ultra-low interest rates, while emerging market economies such as Brazil and Turkey are the first to raise interest rates.
Market analysts believe that developed economies continue to adopt ultra-loose monetary policies to promote their economic recovery, which will further increase inflation expectations, causing long-term government bond yields to continue to rise and financial markets to fluctuate. As the situation increases, the spillover effects caused by excess liquidity will further emerge. Against this background, although they are still deeply affected by the COVID-19 epidemic, some emerging market economies have to raise interest rates early in order to curb currency depreciation and high inflation.
The “dove” voice of developed economies remains
Major developed economies have chosen to maintain ultra-loose monetary policies. On the one hand, because the epidemic continues to cause the pace of recovery to slow down, the economic outlook still faces uncertainty; on the other hand, because the current inflation level is still low.
The Bank of Japan announced on the 19th that it will continue to maintain short-term interest rates at minus 0.1% and maintain long-term interest rates at around zero by purchasing long-term government bonds. Central Bank Governor Haruhiko Kuroda said that in order to achieve the 2% inflation target, the central bank will continue to implement strong easing policies. Data from Japan’s Ministry of Internal Affairs and Communications show that Japan’s core consumer price index has declined year-on-year for seven consecutive months in February.
The Bank of England stated on the 18th that as the British economic outlook still faces uncertainty under the epidemic, it decided to maintain the benchmark interest rate at a historical low of 0.1% and maintain bond purchases of 895 billion pounds. plan.
In order to avoid market fluctuations from affecting economic recovery, the U.S. Federal Reserve announced on the 17th that it will maintain the target range of the federal funds rate between zero and 0.25%, and will maintain it at no less than 120 billion per month. The scale of U.S. dollar asset purchases will continue until substantial progress is made toward the two goals of full employment and price stability.
The Australian Central Bank also decided to keep its benchmark interest rate unchanged at a historically low level of 0.1% in early March. Reserve Bank of Australia Governor Philip Lowe previously stated that the current low interest rates will be maintained until at least 2024.
Data previously released by the Organization for Economic Cooperation and Development showed that the inflation rate among its member countries in January this year was 1.5%.
Spillovers cannot be ignored
In developed economies In the context of the generally adopted ultra-loose monetary policy, the international capital market is flooded with liquidity and investors’ inflation expectations have increased. They have sold off long-term U.S. Treasury bonds and other bonds, causing their prices to fall and yields to rise, which in turn has caused increased volatility in global financial markets.
Since mid-February this year, long-term government bond yields in major European and American markets have accelerated their upward trend. From February 12 to 25, the yield on German 10-year government bonds rose by about 20 basis points. Since the beginning of this year, the U.S. 10-year Treasury bond yield has risen by about 80 basis points, rising by 6.6 basis points in one day on March 18.
Analysts believe that the continued rise in U.S. bond yields may cause a reversal of global market capital flows and violent exchange rate fluctuations, resulting in emerging market economies that have been severely affected by the epidemic and have poor public finances. Facing risks such as capital outflows and debt defaults.
The daily cross-border capital flow report recently released by the Institute of International Finance shows that in the first week of March, emerging markets experienced single-day capital outflows for the first time in the past six months, with daily capital outflows of approximately $290 million. The agency said that the recent rise in U.S. bond yields has amplified market panic, and the net outflow of international funds in emerging market stock and bond markets is the best example of investors’ concerns about the market.
Emerging markets are forced to raise interest rates
For For many emerging market economies, the current epidemic situation is still serious, the economy is fragile, and the debt burden is heavy, which is not a good opportunity to raise interest rates. Raising interest rates at this time will lead to premature tightening of financing conditions for economic sectors, which is not conducive to economic recovery. However, in order to prevent capital outflows, curb currency depreciation and high inflation, the central banks of Brazil and other countries unexpectedly announced interest rate hikes in recent days.
Brazilian Central Bank announced on the 17th that it would raise the benchmark interest rate from 2% to 2.75%. This is the first time the Brazilian central bank has raised interest rates since July 2015.
Brazilian economic analysts believe that this interest rate hike is related to factors such as the increase in Brazil’s inflation rate. The Brazilian Ministry of Economy announced on the same day that it had raised its inflation forecast for Brazil this year to 4.4%. Brazil’s central bank had previously predicted that inflation could reach 4.6% this year.
The Central Bank of Turkey also raised the benchmark interest rate to 19% on the 18th. Data show that as of February this year, Turkey’s annualized inflation rate has risen to 15.6%, and the Turkish lira’s exchange rate against the US dollar has depreciated by more than 50% compared with the beginning of 2018.
The Central Bank of Russia announced on the 19th that it would raise the benchmark interest rate by 0.25 percentage points to 4.5%. This is the first time Russia has raised its benchmark interest rate since late 2018. The Russian central bank pointed out that the move was aimed at combating rapidly rising inflation and stabilizing the domestic currency.
As the central banks of developed economies continue to “release water”, those emerging market economies that have been severely hit by the epidemic will face a more severe internal and external environment, and the road to recovery may be more tortuous and lengthy.
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