社科网首页|客户端|官方微博|报刊投稿|邮箱 中国社会科学网
Hot Topics
Get a grip
2022-12-31 22:07:00
China Daily 2022-12-30
Get a grip
Huang Yutao
Editor's note: The world has undergone many changes and shocks in recent years. Enhanced dialogue between scholars from China and overseas is needed to build mutual understanding on many problems the world faces. For this purpose, the China Watch Institute of China Daily and the National Institute for Global Strategy, Chinese Academy of Social Sciences, jointly present this special column: The Global Strategy Dialogue, in which experts from China and abroad will offer insightful views, analysis and fresh perspectives on long-term strategic issues of global importance.
Global interest rate hike spiral should be slowed down
The interest rate hike cycle has not yet come to an end. The US Federal Reserve has already initiated seven consecutive rate increases this year, illustrating the fastest adjustment in its history. Even though Fed has moderated the pace of increase to 50 basis points, Chairman Jerome Powell emphasized previously that rates would be raised more if inflation remains higher and longer than expected. Similarly, having raised rates by 200 basis points since July to take the deposit rate to 1.5 percent, the European Central Bank also raised rates by 50 basis points in December, the fastest pace of increase in the euro's history.
The rationale behind the raising of interest rates is straightforward — bringing down the elevated inflation to an acceptable level. From February to October, the inflation rate in the European Union soared from 6.2 percent to 11.2 percent. The rate in the United Kingdom and Japan also reached 11.1 percent and 3.7 percent respectively in October, contrasting to their average inflation rate of 2.5 percent and -0.2 percent in 2021. Hence, the voice of ECB President Christine Lagarde represents a widely shared position of central bank governors: "Our job is price stability. This is our primary mandate, and we are riveted to that." By increasing the cost of finance, the technocrats aim to prevent excessive investment and to adjust labor wages, which in turn can stabilize the overheated economy.
However, over-reliance on this instrument would not be a wise decision anymore, as the main triggers of the current problem are fundamentally different from the previous ones. Historically, under the leadership of Paul Volcker, the Fed raised the interest rate sharply to 19.1 percent in June 1981 in response to persistent inflation in the late 1970s. At that time, the US economy confronted a difficult situation as massive investment and government expenditures had been made in an irrational manner to get rid of the 1975 recession.
In contrast, the hyperinflation faced today stems from different reasons. In Europe, it is the geopolitical conflict that has triggered the shortage of food and energy, a typical supply — rather than demand-side problem. In Japan, there is no sign of a heated domestic labor market, suggesting that the rising inflation is attributed to exogenous reasons. In this regard, a policy tool designed to resolve demand-side problems would not be a one-size-fits-all recipe at this time.
The awkwardness becomes clearer when making the benefits-versus-costs calculation in detail. On the one hand, even though the global average interest rate has increased significantly, this instrument becomes less effective — the continually elevated inflation rate in many developed countries is self-evident. On the other hand, side effects are emerging which may trigger further disruptions. For developed countries, borrowing costs for indebted governments must rise along with rising interest rates. Especially, European countries need to mobilize more resources to overcome urgent challenges, such as stabilizing food prices, subsidizing energy imports, and rebuilding security defense. During the hiked-rate cycle, debtors must pay a greater cost to borrow new money, which in turn narrows down the constrained fiscal space.
The situation in developing countries is more challenging. As developing countries mainly issued foreign currency-based sovereign debts, the increase in global interest rates, together with an accompanying collapse in global trade, make them difficult to service their liabilities. Rebeca Grynspan, the former secretary-general of the United Nations Conference on Trade and Development, said at the 13th UNCTAD Debt Management Conference that currency depreciations in African nations have increased the costs of debt repayments that nearly equal the amount of public health spending per year in the continent. She emphasized that developing countries should not have to pay for the bad behavior of one country. Hence, it is not hasty to say that tightened monetary supply exacerbates the distressed debt problem.
Even if a certain degree of raising interest rate is necessary, not every country should adjust its monetary policy in the same manner. Maurice Obstfeld, the former chief economist at the International Monetary Fund, recently suggested that if global factors have contributed more to pushing up domestic inflation, each central bank should tighten monetary supply less as others' endeavors will have synchronous effects in helping amplify the external impacts. This partially explains why the Japanese central bank remains at a low-interest rate amid currency depression pressures and speculation risks. As Japan's raising inflation resembles an input type, waiting for the effects of others' monetary policy to materialize a trade-off to avoid damaging domestic economic vitality.
Therefore, it is time to slow down the global interest hike spiral. Policymakers should find new ways to resolve the current problems rather than following an entrenched path-dependence. Particularly, the most effective anti-inflation measures may be not within the remit of central banks but lie in getting a global grip on the pandemic, ending the geopolitical conflict in Europe, and solving the supply-chain disruptions. Even though continually raising interest rates at radical paces may help anchor the goal of a stable price, suffering the risk of stepping into a global recession is obviously not worthwhile.
Global policy collaboration also calls for a critical adjustment in cushioning the macroeconomic instability. A positive signal is that under the presidency of India, the G20 intends to evaluate the impacts and solutions of the food and energy supply disruptions, rather than relying on the instrument of interest rates alone to stabilize custom prices. The Framework Working Group also expects to rethink the downside risks of financial globalization, including volatile capital mobility and fiscal constraints caused by monetary policy change. As the group members are critical players in designing and sustaining the international system, we should keep watching the new innovative proposals that will be generated in due course.