The interest-rate party begins without the ECB Japan and China

by Shaun Richards

As we get ready for Easter ( my part of London seems to have emptied out already) there has been something of a barrage of action from some central banks. It started in New Zealand.

The Monetary Policy Committee today increased the Official Cash Rate (OCR) to 1.50 percent. The Committee agreed it is appropriate to continue to tighten monetary conditions at pace to best maintain price stability and support maximum sustainable employment.

As ever the central bankers were keen to obfuscate on the issue of inflation.

The Reserve Bank’s core inflation measures are at or above 3 percent. Inflationary pressure is being further accentuated by current high imported energy and commodity prices, which are lifting headline CPI inflation.

Inflation is only around 3% if you ignore food and energy and as the current issues revolve around them especially energy we see that the ordinary person faces something quite different.

Members noted that annual consumer price inflation is expected to peak around 7 percent in the first half of 2022.

Rather breathtakingly they claim to be acting early.

 The Committee agreed that their policy ‘path of least regret’ is to increase the OCR by more now, rather than later, to head off rising inflation expectations and minimise any unnecessary volatility in output, interest rates, and the exchange rate in the future. The Committee agreed to a 50 basis point rise in the OCR, consistent with this least regrets analysis.

Oh Canada!

The next guest at the party was in North America and let me point out that the Bank of Canada is in my opinion operating a policy of following what it thinks the US Federal Reserve will do.

Bank of Canada increases policy interest rate by 50 basis points, begins quantitative tightening….The Bank of Canada today increased its target for the overnight rate to 1%, with the Bank Rate at 1¼% and the deposit rate at 1%.

As to why we have a rather similar situation as the Kiwis.

CPI inflation in Canada is 5.7%, above the Bank’s forecast in its January Monetary Policy Report (MPR). Inflation is being driven by rising energy and food prices and supply disruptions, in combination with strong global and domestic demand. Core measures of inflation have all moved higher as price pressures broaden. CPI inflation is now expected to average almost 6% in the first half of 2022 and remain well above the control range throughout this year.

Tucked away in the explanation is something rather revealing. You see it is not the inflation they are responding to as that is real and therefore really rather inconvenient it is the much more malleable inflation expectations.

There is an increasing risk that expectations of elevated inflation could become entrenched. The Bank will use its monetary policy tools to return inflation to target and keep inflation expectations well-anchored.

Putting it another way they are not convinced by their own policies and I do not blame them.

There is something of a historical parallel here as it was New Zealand and Canada who started the inflation targeting regime system although in the opposite order.

Bank of Korea

The next central banking cab off the rank came early this morning.

The Monetary Policy Board of the Bank of Korea decided today to raise the Base Rate by 25 basis points, from 1.25% to 1.50%.

So only a 0.25% move but to a higher level in response to this.

Consumer price inflation has risen significantly to the lower-4% level due to soaring prices of petroleum products as well as the accelerating increase in the prices of industrial products and personal services. ….. Looking ahead, it is forecast that consumer price inflation will remain high in the 4% range for some time, and run substantially above the February forecast of 3.1% for the year overall.

So we see why the move is smaller which is because inflation has been lower too no doubt partly because of this.

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the Korean won to US dollar exchange rate have risen significantly

But there is another factor in this story which may also explain why Korea has made a smaller move as they effectively start to consider that I may be right about stagflation being ahead of us.

 GDP growth this year is projected to be somewhat below the February forecast of 3%.

How much below? It is hard to peer through the smokescreen around what is taking place in China but I think we can be clear that there has been a brake on any economic growth in places like Shanghai. Also as we note the numbers below from the Atlanta Fed are annualised the US economy looks to have slowed considerably in the first quarter of this year.

The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2022 is 1.1 percent on April 8, up from 0.9 percent on April 5.


Later today the ECB will hold its press conference and President Lagarde will wear her Hermes scarf and perhaps the Owl brooch which the Financial Times liked so much Maybe she will have another go at telling people this.

But possibly also in the medium term, but not exclusively, because risk to inflation could also be to the downside.

The problem with that is that it keeps going higher as she assures everyone it will go down.

The baseline for inflation in the new staff projections has been revised upwards significantly, with annual inflation at 5.1 per cent in 2022, 2.1 per cent in 2023 and 1.9 per cent in 2024.

But economic growth is going the other way.

GDP growth has been revised downwards for the near term, owing to the war in Ukraine. The projections foresee the economy growing at 3.7 per cent in 2022, 2.8 per cent in 2023 and 1.6 per cent in 2024.

I think that the German economy is contracting or as the Bundesbank put it on the 23rd of March.

“The impact of Russia’s attack on Ukraine is likely to place a noticeable strain on economic activity in Germany from March,” the report continues, however. Supply chain problems are likely to intensify again………“From today’s perspective, the strong recovery expected for the second quarter is likely to turn out considerably weaker,” the experts write.

Therein lies the ECB problem which is inadvertently described by Reuters.

For now, the ECB plans to end bond purchases, commonly known as quantitative easing, at some point in the third quarter, with interest rates going up “some time” after that.

That is a novel approach as in dealing with inflation now by raising interest-rates at some unspecified future date.  The issue is that it feels it cannot raise an interest-rate which is -0,5%.

I think that Sir Humphrey Appleby described this as “masterly inaction”

“Given the high levels of uncertainty, (the ECB) will likely want to maintain the optionality and flexibility,” ABN Amro economist Nick Kounis said.


There are layers to this particular cake. If we start with the central banks which are acting now the issue is this.

And it’s too late, baby, now it’s too late
Though we really did try to make it ( Carole King)

The issue is the one of timing as I was pointing out last summer. Now they are rushing to act in an economic slow down. They chose to ignore the fact that it matters when you do things due to the leads and lags in the system.

Next comes the central banks like the ECB that have no room for manoeuvre at all and only have a combination of a word salad and some minor QE bond buying changes to give the appearance of action. The gap between inflation and the interest-rate is 8% which is a clear signal of the financial repression at play here. The numbers are lower in Japan but they will be having a wry smile at the idea of the Euro effectively Turning Japanese.

Finally we have China that seems to be getting ready for an interest-rate cut.

Chinese Premier Li Keqiang on Wednesday signals bank reserve ratio cut, encourage large banks to lower provision coverage ratio, vowed to roll out measures to boost consumption, as part of efforts to support the economy amid rising downward pressure. ( Yuan Talks )


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