Global inflation & rates/ Europe goes to Beijing/ Global Britain & TPP/ Taiwan risks/ Finland

Lower rates, higher inflation

In the wake of last month’s implosion of Silicon Valley Bank, the Federal Reserve moderated the pace of monetary tightening – raising rates by 25bp rather than the previously expected 50bp.  And markets continue to price in rate cuts this year – assessing that the rate hiking cycle is close to concluding as the pressure of higher interest rates on financial stability and the real economy become more evident.

This course adjustment from the world’s most important central bank has shaped central bank decision-making around the world.  In the weeks since the Fed meeting, several other central banks have also slowed.  The Reserve Bank of Australia held rates unchanged on Tuesday, pausing to assess the economic data; the Bank of Israel increased rates by 25bp on Monday – moderating the pace of its tightening process – partly on concerns about the economic impact of the mass protests; and the Monetary Authority of Singapore is expected to pause its tightening next week.

In that context, Wednesday’s decision by the Reserve Bank of New Zealand to hike rates by 50bp (above the expected 25bp increase) stands out.  This was in response to strong inflationary pressures in New Zealand, despite evidence of interest rates biting on the economy.  The Reserve Bank has now increased rates by 450bp since January 2022.

Indeed, although headline inflation is now reducing across many advanced economies, core inflation remains well above target.  This will require responses by some central banks.  In Sweden, for example, further tightening is expected on strong inflationary pressures. And some hawkish US voices are picking further Fed policy rate increases to curb high inflation.

But my overall sense is that slowing economies and growing pressures in interest rate sensitive sectors (financials, real estate) will constrain the extent of further interest rate increases in many advanced economies.  The shift to an easier monetary policy stance will likely front-run significant reductions in core inflation.  I continue to think persistent above-target inflation – perhaps in the 3-4% range – is likely in both the near-term (due to the economic and financial risks of high rates) and over time due to the structural inflationary pressures of a ‘war time economy’.

Europe goes to Beijing

European leaders are re-engaging with China as it reopens.  Spanish PM Sanchez met with President Xi last week, restating the European position on a role for China in engaging with Russia on Ukraine (but with no evident progress).

And today and tomorrow, President Macron as well as European Commission President von der Leyen are meeting with President Xi.  A key goal for this visit is to press China to engage with Russia on a diplomatic resolution to the war; President Xi has still not contacted President Zelenskyy since his meetings in Moscow a few weeks back – or indeed, since the war commenced.  Mr Macron had little success with his diplomacy with Mr Putin before and after the invasion, and it is not clear that he will have more success in China.  But the stakes make it worth trying.

In advance of this visit, Ms von der Leyen gave a good, tough speech on China in Brussels last week. 

The full note is available at: https://davidskilling.substack.com/p/global-briefing-global-inflation