Early hike rates won’t mean taking a break later
Two of the world’s top hikers, the Bank of Korea and the Reserve Bank of New Zealand, signaled no impending let up in the battle against soaring prices. Neither does Singapore, which imports a large part of what it consumes and which is extremely vulnerable to international economic trends. The BOK, which started raising rates by a quarter of a point almost a year ago, abandoned incrementalism on Wednesday: the bank raised its benchmark rate by half a point to 2.25 %. That it was predicted by a majority of economists does not make it any less remarkable. New leader Rhee Chang-yong has apparently decided that with inflation well above target, moderation and stability are in danger of being confused with timidity. Rhee raised the prospect of a return to smaller payouts, but pointed out that inflation was too high. The RBNZ unveiled its third sequential half-percentage-point rise and announced more to come. “The Committee is steadfast in its commitment to ensuring that consumer price inflation returns to the target range of 1-3%,” the central bank said in a statement that also acknowledged weakening global growth. . Price escalation is the near enemy; the slowdown in activity is more distant. Like their counterparts in Seoul, New Zealand officials nevertheless warned of falling house prices.
In an unforeseen development on Thursday, the Monetary Authority of Singapore launched a new inflation strike. The city-state which is a financial hub has now tightened policy four times, starting in October. The MAS warned that global expansion is slowing, but not price pressures. Officials raised their estimate of consumer price increases this year, while predicting gross domestic product will rise at the low end of their range by 3-5% this year.
What is striking about equities in Korea and New Zealand is that the duo are facing significant growth erosion or even recession. Yes, inflation is too high; Korean consumer prices rose the most in a generation in June. No central banker wants to be damned by history as one who was overly optimistic and allowed soaring prices to feed into decisions, not to mention psychology, consumers and businesses. Wellington and Seoul aren’t outliers either: the Federal Reserve is eyeing a second straight 75 basis point hike this month, the European Central Bank is nearing liftoff and Singapore is tightening. The ink was barely dry on the Reserve Bank of Australia calling the 25 basis point boosts “business as usual” as it transitioned to moves twice as big. The quarter-point steps that once conveyed unspectacular but worthy resolution are now outdated.
That’s a shame. As corrosive as inflation is, economic downturns are also damaging. The dangers in South Korea and New Zealand are increasing. Korean consumer confidence plummeted; Nomura predicts the economy will contract this quarter. The RBNZ forecasts a substantial slowdown in growth next year and forecasts rate cuts in 2024. Kiwi officials aren’t ruling out the ‘R’ word, nor are they assuming it. There is little comfort in such a middle position: central banks and governments tend not to recognize that they have done too much until the downdraft is upon them. Soft landings are widely touted, but difficult to achieve. The odds are not in their favor.
Both countries will suffer from the global slowdown already at hand. The International Monetary Fund predicts global growth of 3.6% this year. This looks quite robust and is much better than the strong contraction of 2020. But the momentum is not promising; the lender’s April forecast cuts were the biggest since the early days of Covid-19. The IMF on Tuesday lowered its one-month estimate for US expansion to 2.3% this year. The Fund has always viewed global growth of around 2.5% or less as a recession. Are central banks rushing headlong into a recession because inflation is seen as public enemy number one, when many are mandated to also worry about jobs?
Both nations are avatars, in their own way, of the modern global economy. South Korea is a vital link in the technology supply chain, with exports accounting for around 40% of gross domestic product. Its population is shrinking, and officials have expressed concern over exorbitant housing costs. New Zealand pioneered modern inflation targeting three decades ago. The small open economy also has an unenviable knack for acting early and quickly to rein in price increases, to reverse the trend almost as quickly.
Esther George, Kansas City Fed President, is perhaps the most disturbing – and surprising – person to question the breakneck pace of tightening. She has earned a reputation over the years as one of the most hawkish members of the Federal Open Market Committee. When George expresses reservations that things might be moving too quickly in the United States, it’s worth paying attention to. “This is already a historically rapid pace of rate increases that households and businesses must adapt to, and more abrupt changes in interest rates could create strains, whether in the economy or financial markets,” she said in a speech on Monday. It’s not inconceivable that by this time next year we’ll be wondering how many cuts are coming and how eagerly. The giant hikes so in vogue today might still be considered, in retrospect, a last hurray rather than the gold standard. (Adds Singapore crunch in third and fifth paragraphs.) More from this writer and others on Bloomberg Opinion:
• Jay Powell took Ben Bernanke’s advice a bit too far: Daniel Moss
• US economy heading for a hard landing: Bill Dudley
• The ECB needs a formidable anti-fragmentation tool: Marcus Ashworth
(Updates with Singapore’s tightening policy in fifth paragraph.)
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously, he was Bloomberg News’ economics editor.
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