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Inflation is Prompting Global Monetary Policy Normalisation

Dec 08, 2021   •   by   •   Source: Proshare   •   eye-icon 838 views

Wednesday, December 082021  / 02:25 PM / by Fitch Ratings / Header Image Credit: Global Banking and Finance Review

 

The scale and longevity of the global inflation shockhas taken most forecasters and central banks by surprise and is bringingforward the start of global monetary policy normalisation, says Fitch Ratingsin its latest Global Economic Outlook (GEO), published today.

 

A strong recovery in global aggregate demand innominal terms over the past year has not been matched by an equal recovery inoutput. Supply bottlenecks resulted in real GDP expanding by less than expectedin 3Q21, with prices increasing by more than anticipated.

 

Fitch has cut its 2021 growth forecasts for the US,Germany and Japan, reflecting recent supply-chain-related disruptions toindustrial production. And we have revised down global GDP growth by 0.3ppsince the September GEO, to 5.7%. This is still the fastest rate since 1973though. We are far from stagflation.

 

Our world growth forecast for 2022 has also been cut,to 4.2% from 4.4%, but this primarily reflects a more intense slowdown inChina. The policy response there has been slower than expected with just twocuts to the reserve requirement ratio announced this year, and while weanticipate more easing announcements in the next few months, we now expectChina's growth to fall to 4.8% in 2022 from 8.0% in 2021.

 

We have revised US growth in 2021 to 5.7% (from 6.2%in the September GEO) and cut 2022 growth to 3.7% (from 3.9%). We also loweredour eurozone growth forecast for 2021 to 5.0% (from 5.2%), but our forecast for2022 is unchanged at 4.5%. Growth in emerging markets excluding China isforecast at 5.7% in 2021 and 4.6% in 2022, both 0.1pp lower than in September,partly reflecting a sharp deterioration in Brazil's economic outlook.

 

"There are now signs that price level shocks relatedto pandemic shortages are starting to morph into ongoing inflation. Withmonetary policy settings still super-loose, this is worrying central bankers", said Brian Coulton, Chief Economist.

 

The sharp rise in global consumer goods prices sinceMarch primarily reflects a surge in goods demand, fuelled by stimulus measures,particularly in the US. Goods prices should stabilise in 2022 as spendingswitches back to services, strong investment boosts goods supply, and fiscalstimulus unwinds.

 

But there have been widespread upward revisions to ourinflation forecasts and the increasing prospect of inflation pressuresbroadening is making central banks nervous. Inflation has become a publicconcern now amplified by energy price shocks and inflation expectationshave increased. US wage growth now exceeds pre-pandemic rates as the laboursupply recovery lags. Stimulus is taking US GDP above pre-pandemic trends andthe US output gap will turn positive in 2022. US core CPI inflation is expectedto settle at around 3% in late 2022 and 2023, significantly higher thanpre-pandemic rates.

 

We now expect the Fed to raise interest rates inSeptember 2022 and the Bank of England (BOE) later this month, both far soonerthan we had expected. High inflation is raising policy tensions. The OmicronCovid-19 variant of concern represents a downside risk to growth but couldadversely affect supply leading to further price increases, implying risks ifcentral banks delay normalisation.

 

Monetary policy responses are becoming more divergent,with ECB interest rates still likely to remain on hold through 2023 and thePBOC expected to cut interest rates in 2022. Further strengthening in the USdollar is expected.

 

A stronger dollar and weaker Chinese growth couldweigh on commodity prices in 2022, adding to constraints on emerging-marketgrowth, including from domestic monetary-policy tightening.

 

Proshare Nigeria Pvt. Ltd.


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