Why Interest-Rate Hawks May Not Sweep All Before Them in 2022
(Bloomberg Opinion) -- The much-trumpeted transition to living with Covid-19 means adjusting to monetary policy that is a bit less free and easy. The shift — easy to talk about, hard to execute — doesn’t mean signing up to an unqualified assault on inflation.
The idea that 2022 will be dominated by interest-rate hikes was all the rage in the closing days of December. That sentiment was driven in large part by a surprise rate increase from the Bank of England, and, to a lesser extent, by the Federal Reserve’s decision to double the pace that it tapers bond purchases. Economists raced to pencil in additional steps to tighten policy, reflecting officials’ concern that inflation is too elevated for comfort. So dominant has this idea become that it risks missing significant nuances: Some central banks will proceed to nudge up rates while others resist the stampede. Among the early movers, look carefully for signs of diffidence.
If omicron delivers just a few scratches, then banks in the Asia-Pacific region that pursued a hawkish approach in 2021, such as South Korea and New Zealand, will be vindicated. Should the hit to growth be significant, then recalibration might be be quick. The fight against inflation won’t be heedless of the potential costs.
This tricky terrain tends to undermine forward guidance, a tool for managing rate expectations that was elevated almost to an art form in the decade after the global financial crisis. The idea is that officials tell you what they’ll do so far in advance that by the time they get around to it, the action is a bit of a yawn. That isn’t the planet we’re living on now. Officials are expected to combat inflation with vigor, but if growth falters, they will be under as much — or more — pressure to buttress activity. We are in a world of data dependency and risk management. It isn’t for the faint-hearted.
The BOE is exemplary because its shock hike on Dec. 16 set the tone for discussion at year-end. The bank raised its main rate by 15 basis points to 0.25%, citing inflation that is well above its target. This step came a month after officials surprised in the other direction and did nothing. Much attention has been focused on the unanticipated nature of the move; there’s been insufficient scrutiny of the size. If inflation really has become such a big deal, 15 basis points won’t do anything. Yes, it’s a start — one so modest as to suggest a lack of conviction.
Caveats are creeping in among the hawks. When Seoul hiked in August, the step was said to herald a series of increases running through 2022. The Bank of Korea sounds more nuanced now. “With the emergence of the new variant, it’s difficult to gauge when the pandemic will end, and there are concerns that high inflation may last longer than expected due to supply disruptions and climate change polices,’’ Governor Lee Ju-yeol said in a speech last week. His comments largely echoed the previous stance that hikes will continue, with the notable condition that the pace and timing will depend on how the pandemic affects the economy.
The People’s Bank of China is beyond provisos. In a statement on Dec. 25, the authority made clear its principal goal is to arrest a slowdown in growth. The PBOC pledged greater support for the expansion and that there will be more “proactive” deployment of policy. The bank already cut reserve requirements for lenders twice in 2021, and further easing is anticipated. For all the anxiety a cold war on technology and market access is causing, monetary policy is shaping up to be the big split.
The more cautious stance of the Reserve Bank of Australia may yet be vindicated. Governor Philip Lowe has been at pains to discourage the idea that rates will escalate in 2022. That’s not the same as doing nothing. The RBA is expected to end quantitative easing in the first half of the year, possibly as soon as February. Given how economics Down Under were lauded during the three-decade run without a recession, the reluctance to sprint is an important qualifier to the global hawkish narrative.
No preview of Asian monetary policy is complete without noting the potential for further radicalism in Indonesia, or for its debt monetization to go wrong. The 2020 direct purchase by the central bank of bonds from the Finance Ministry was billed as a one-time emergency step. Despite those assurances, the program was extended for two years. It would have been considered heresy in the years before Covid, and Jakarta got a pass in a benign global rate picture at the time. If Indonesia dips into the well again, will investors be so forgiving?
The year is likely to be more textured than the heavy breathing about inflation and interest rates in December suggests. Controversial decisions will be made and, with them, a few mistakes. Don’t expect economies to march in lockstep. For people who spent the 2010s moaning about the predictability of central banks, congratulations. Vindication may be less than comfortable.
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Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.
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