World central banks set policy for war-torn economies

Global central banks will this week offer the biggest collective assessment of a changed world since Russia’s invasion of Ukraine triggered further supply disruptions and a sudden inflationary shock for many economies.

Of the eight members of the Group of 20 whose monetary officials are to meet, the Federal Reserve’s impending interest rate hike is expected to steal the show.

The others will display a kaleidoscope of policies reflecting the different impacts of the conflict in a global economy already adjusting to soaring prices. Decisions will range from another potential rate hike at the hawkish Bank of England, to the likely outcome of the Bank of Japan insisting on a continued easing stance.

The announcements follow the European Central Bank’s surprise decision last week to accelerate the tapering of stimulus, leaving investors wondering what other changes might be in store.

The following is an overview of the major currency meetings for the week ahead.

China

First up on Tuesday is the People’s Bank of China. Analysts are watching closely whether a key rate will be lowered for the second time this year.

While activity data in January and February likely showed some improvement, risks loom as geopolitical tensions escalate and oil prices climb. Beijing’s new growth target of around 5.5% this year could also imply the need for central bank support.

China’s total credit and new loans fall after strong January data
Adding to the case for monetary easing, China’s credit expansion slowed in February due to the long holidays and the housing market slump meant individuals and businesses borrowed less.

What Bloomberg Economics says:

“We expect the PBOC to cut the reserve requirement ratio further to free up more cash for banks to lend, and then lower interest rates to bolster the stimulus.” –David Qu, economist.

Federal Reserve

The Fed takes center stage on Wednesday. An expected quarter-point hike in the benchmark rate would be the first since 2018. President Jerome Powell must balance the highest inflation in four decades and war-related uncertainty.

Last week’s data showed consumer prices rose 7.9% in February from a year earlier, and inflation is set to rise even higher as costs rise. raw materials increase. On the eve of the Fed’s decision, investors will get another key data point, with a large increase in the producer price index likely.

In an environment of inflation well above the Fed’s 2% target, labor market tensions are driving up wages, another tailwind to price pressures.

In addition to raising rates, the Fed plans to shrink its balance sheet by nearly $9 trillion later in 2022 after making purchases this month to support the economy during the pandemic.

What Bloomberg Economics says:

“This move will come after a relentless drumbeat of high inflation readings. Under normal circumstances, inter-meeting data would support a 50 basis point hike. But the circumstances right now are extraordinary. -Anna Wong, Yelena Shulyateva, Andrew Husby, Eliza Winger, Economists.

Brazil

After the Fed on Wednesday, Brazil’s central bank is expected to raise its key rate for a ninth consecutive meeting, to 11.75%. That’s up from just 2% a year ago.

The driving force behind the aggressive tightening cycle is a surge in consumer prices. Central Bank chief Roberto Campos Neto faces inflation that is now over 10%, three times the official target.

Just a month ago, traders and analysts in Brazil expected the up cycle to reach around 12.25%, but it is now estimated at 13.75%. For an economy that is expected to barely grow this year, it’s a bitter pill to swallow.

What Bloomberg Economics says:

“We continue to expect a 100 basis point increase next week, but recognize the significant upside risks that the terminal rate will exceed our forecast of 12.25%.” –Adriana Dupita, economist. For a full analysis, click here

Indonesia

On Thursday, the focus will shift to Bank Indonesia, which will review commodity and food price risks in a move that is expected to keep rates unchanged.

The central bank recently said it was watching for a build-up in imported inflation, although it sees consumer prices as relatively manageable. The overall and core gauges in February remained at the lower end of its 2% to 4% target, while the government pledged to limit volatile food costs.

Faster-than-expected price pressures, however, could affect Bank Indonesia’s rally timing, with economists seeing a take-off in the second half of this year. Meanwhile, the commodity boom has helped counter selling pressure on the rupee as its export volumes and values ​​remain robust.

What Bloomberg Economics says:
“Bank Indonesia will leave its 7-day repo rate unchanged, in our view. The rupiah and core inflation suggest there is still time to let the recovery gain traction.

Turkey

Later Thursday, Turkey’s central bank is likely to hold its rate at 14%, in line with President Recep Tayyip Erdogan’s unorthodox approach of favoring looser policy over tightening to stifle inflation which is at its peak. high level for 20 years.

The pace of annual consumer price increases reached 54% in February, fueled by energy and food, and the global impact of the war could further aggravate these pressures.

This would threaten to prolong the cost of living pressure facing Turkish households, a narrative that could become more pressing as the 2023 election approaches.

What Bloomberg Economics says:

“Inflation is at its highest level in 20 years and Russia’s invasion of Ukraine will likely keep it high. But raising interest rates is not politically viable.

bank of england

Shortly after Turkey’s move, the BOE looks all but certain to bring its key interest rate back to pre-Covid levels, the first major central bank to take the step.

Faced with a worsening inflation outlook that Bloomberg Economics predicts could push inflation to single digits later this year, officials are expected to raise their benchmark to 0.75%. As the UK also grapples with a cost of living crisis, some economists predict a minority of officials will push again for an unprecedented 50 basis point hike.


A hike of any kind would mark the third straight increase, a pace not seen this century. Markets are also expecting policymakers, led by Governor Andrew Bailey, to signal that more action is ahead. Investors are currently expecting rates to reach 2% by the end of the year.

What Bloomberg Economics says:

“Beyond this month, we expect the magnitude of the tightening to be reduced by concerns over the economic impact of Russia’s war on Ukraine. High inflation this year worries the BOE.–Dan Hanson, UK Senior Economist For a full analysis, click here

Japan

With inflation still far behind accelerating levels in much of the world, the BOJ is expected to keep all metrics unchanged on Friday and stick to the message that domestic price growth is still too weak.

However, the communication task becomes more difficult. Governor Haruhiko Kuroda and his colleagues have recently stressed the importance of stronger wage growth to ensure that inflation is part of a virtuous cycle of growth. The takeaway is that monetary easing needs to continue for longer.

But even the BOJ acknowledges that higher oil prices are already pushing inflation beyond its forecast, according to people familiar with the matter.

Adding to the pain for households and businesses, the yen hit its weakest level in more than five years on Friday after the ECB’s surprisingly hawkish decision and the acceleration of US inflation. Further easing will put Japan in an increasingly difficult position.

What Bloomberg Economics says:

“Two factors are changing the dynamics of growth and inflation in Japan – the Russian-Ukrainian war and the prolonged virus restrictions. We will focus on the BOJ’s assessment and any guidance it gives.”

Russia

The week ends with the Bank of Russia’s first regular interest rate meeting since the invasion of Ukraine led to harsh sanctions and the seizure of much of its more than 640 billion dollars of foreign exchange reserves.

Officials should keep monetary parameters unchanged and monitor developments after already more than doubling the key rate to 20% on February 28. It was one of a series of defensive measures aimed at limiting the panic selling of Russian assets, including the ruble, which plunged more than 35% in less than a month.

The country’s falling currency and disrupted trade outlook are pushing consumer prices toward one of the biggest spikes this century. In the first full week since the Russian invasion, inflation hit 2.2%. It’s the biggest increase since statisticians started tracking the data in 2008, and more than double a previous record high.

What Bloomberg Economics says:

“A surge in inflation has already begun and there is little more monetary policy can do to contain it.”

© 2022 Bloomberg

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