Global economy hit by inflation, interest rate shock with no signs of easing: IIF
The Institute of International Finance (IIF) said the global economy has been hit by rising inflation and an interest rate shock that has shown no signs of abating, bne IntelliNews reported.
“We are in a global shock of interest rates and high inflation. Yields on longer-term government bonds have risen sharply in advanced economies, tightening financial conditions, weighing on growth and increasing the risk aversion,” IIR chief executive Robin Brooks said in a note with economists Jonathan Fortun and Jack Pingle.
“It’s also weighing on outflows to emerging markets, with our tracking of high-frequency outflows in the world’s largest emerging markets recording outflows of a similar magnitude to the RMB devaluation scare in 2015 and 2016,” he said. said Brookes.
Inflation rose in both developing and developed country markets, according to the publication.
Read more: Inflation and subsidy reform hit the stomach in isolated Iran
Inflation is also starting to spiral out of control, according to the publication, in Central European markets, with large increases in monetary policy rates in these countries failing to reduce the “explosive growth” of inflation.
Czechia, Moldova, Slovakia, Romania, Poland and Bulgaria, among others, are experiencing double-digit inflation rates.
The reason for the rise in inflation was blamed on supply chain disruption caused by the coronavirus pandemic, then further intensified due to the food shock following the Russian-Ukrainian war.
As a result, the World Bank downgraded the global economic outlook in May to 2.9% for this year and warned that the world faced a “real danger of stagflation”.
But the IIR noted that the world is not there yet. According bne IntelliNewsemerging European countries have negative single-digit interest rates, which means that their central banks can still control inflation by aggressively raising interest rates.
“Having said that, we’re not that bearish on EM. Most major emerging markets started moving higher long before advanced economies, which now leaves longer-term real interest rates in many emerging markets well in the doldrums. above their G10 counterparts,” Brookes said. “That provides some protection against this global interest rate shock.”
“There are obviously pockets of weakness in emerging markets – where real interest rates are deeply negative – and the risks for these countries are growing rapidly. We view these cases as idiosyncratic, however, and not emblematic of a broader emerging market issue,” Brookes said.
Ongoing global inflation is the worst since the 1970s, as World Bank and IIR reports point out, but despite this, central banks are better equipped to deal with it.
Read more: Weekly inflation hits 14-year high
“The world is experiencing one of the biggest interest rate shocks in recent memory. It’s not so obvious if you look at longer-term nominal interest rates, but it’s very clear if you look at real yields, which have increased significantly,” said the CEO of the IIR.
“The real yield on 10-year U.S. Treasuries has risen from -1.1% at the end of last year to +0.7% now, a bigger rise than during the ‘taper tantrum’ of 2013. The most indebted countries are even harder hit Italy’s 10-year real yield has fallen from -0.7% at the end of 2021 to 1.8% today, a price revision very strong – although orderly.
The increase in key rates in developed countries is “bad news” for emerging markets because it deprives them of money.
“So interest rate shocks have historically generated money outflows from emerging markets and that is indeed what we are seeing,” Brookes said.
Read more: Americans are feeling the heat as annual U.S. inflation posts biggest rise since 1981
“Our high-frequency tracking of non-resident portfolio flows in some of the largest emerging markets finds outflows on a scale comparable to the RMB devaluation scare in 2015/6, with outflows concentrated in emerging markets. not Chinese.”
“Meanwhile, flows to China have picked up so far this quarter, although weaker than in the past, dating back to the start of the war in Ukraine.