Such is the determination these days to look tough on inflation that to even risk being portrayed as dovish is a stigma, regardless of merit.
The relentlessness with which many central banks are raising interest rates into a slowing global economy shows there is little reward in modest, albeit consistent, steps. No matter whether the officials in question were among the first to begin withdrawing pandemic-era stimulus. The consequent risks of overdoing it and being forced into an about-face and cutting in 2023 — or earlier — are mounting.
Two of the world’s earliest hikers, the Bank of Korea (BOK) and the Reserve Bank of New Zealand (RBNZ), signalled no imminent letup in the battle against soaring prices. Nor did Singapore, which imports a lot of what it consumes and is acutely vulnerable to international economic trends.
The BOK, which began lifting rates in quarter-point steps almost a year ago, ditched incrementalism on July 13: The bank raised its benchmark rate by a half point to 2.25%. That it was predicted by a majority of economists makes it no less noteworthy. New chief Rhee Chang-yong has apparently decided that with inflation well above target, measured and steady risks being conflated with timidity. Rhee held out the prospect of a return to smaller instalments, but emphasized that inflation is too high.
The RBNZ unveiled its third sequential hike of half-a-percentage point and signalled more to come. “The Committee is resolute in its commitment to ensure consumer price inflation returns to within the 1% to 3% target range,” the central bank a weakening global growth picture.
Escalating prices are the near enemy, slackening activity is more distant. Like their counterparts in Seoul, New Zealand officials nevertheless warned of a hit to house prices.
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In an unscheduled development on July 14, the Monetary Authority of Singapore (MAS) launched yet another strike against inflation. The city-state that is a hub for finance has now tightened policy four times, beginning in October. The MAS warned that the world expansion is slowing — but price pressures are not. Officials raised their estimate for consumer price increases this year, while predicting gross domestic product will grow at the lower end of their 3% to 5% range this year.
Recession?
What is striking about the actions in Korea and New Zealand is that the duo face a significant erosion in growth, and possibly recession. Yes, inflation is too high, Korean consumer prices rose the most in a generation during June. No central banker wants to be damned by history as the one who was too sanguine and allowed skyrocketing prices to become embedded in the decisions, let alone psychology, of consumers and businesses.
See also: ECB’s Schnabel sees only limited room for further rate cuts
Nor are Wellington and Seoul outliers: The Federal Reserve (Fed) is weighing a second consecutive 75 basis point (bp) hike this month, the European Central Bank is approaching lift-off, and Singapore is tightening. The ink was barely dry on the Reserve Bank of Australia labelling 25 bp nudges “business as usual” than it switched to moves of twice that magnitude. Quarter-point steps that once conveyed unspectacular but worthy resolve are now out of fashion.
That is a pity. As corrosive as inflation is, economic downturns are also injurious. The dangers in both South Korea and New Zealand are mounting. Korean consumer confidence has plummeted; Nomura predicts the economy will shrink this quarter. The RBNZ forecasts a substantial slowdown in growth next year, and has projected rate cuts in 2024.
New Zealand officials do not rule out the “R” word, nor do they assume it. There is little comfort is such a middle-of-theroad stance: Central banks and governments tend not to acknowledge they have overdone it until the downdraft is upon them. Soft landings are widely touted, but tricky to pull off. The odds are not in their favour.
Both countries will suffer from the global slowdown already at hand. The International Monetary Fund (IMF) projects global growth of 3.6% this year. That sounds fairly robust and is way better than the steep contraction of 2020.
But the momentum is not promising, cuts to the lender’s forecast in April were the most since the early days of Covid-19. The IMF on July 12 sliced its month-old estimate for America’s expansion to 2.3% this year. The Fund has historically regarded world growth of around 2.5% or less to be recessionary.
Are central banks charging headlong into a recession because inflation is seen as public enemy number one, despite many having a mandate to also worry about employment? The two nations are avatars, in their way, of the modern global economy. South Korea is a vital part of the technology supply chain, with exports accounting for about 40% of gross domestic product. Its population is contracting and officials have expressed anxiety about sky-high housing costs.
New Zealand, on the other hand, pioneered modern inflation targeting three decades ago. The small, open economy also has an unenviable knack for moving early and quickly to break price gains, only to reverse course almost as quickly.
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Perhaps the most disquieting — and surprising — person to question the torrid pace of tightening is Esther George, president of the Kansas City Fed. She has acquired 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 hastily in the US, it is worth paying attention. “This is already a historically swift pace of rate increases for households and businesses to adapt to, and more abrupt changes in interest rates could create strains, either in the economy or financial markets,” she said.
It is not inconceivable that this time next year, we will be wondering how many reductions are coming and with what alacrity. The jumbo hikes so in vogue now might yet be seen, in retrospect, as a last hurrah rather than the gold standard. — Bloomberg Opinion
