Global monetary trend divergence

The FED is expected to hike the fed funds rate by more than six times in 2022 after the rate hike at the March meeting.

In early 2020, while the global economy was in a deep freeze and on the brink of a severe recession due to unprecedented social-distancing restrictions, governments with massive fiscal support packages and central banks with super-easing monetary policies were the ones that brought the economy back from the trough to a like V-shaped recovery.

As an avoidable consequence of the fast economic recovery to a pre-pandemic long-term potential growth trend, the economy has been suffering the largest inflation shock in decades, and it seemed to be underestimated by policymakers, notably the FED (U.S. Federal Reserves) and ECB (European Central Bank) until recently.

In Kis Vietnam’s view, there are many factors that led to an underestimation of the inflation shock during the pandemic period, including: (1) the recovery momentum of most economies, especially the U.S. economy, was faster than expected before; and (2) the consumption demand of people continued to increase strongly even after the withdrawal of COVID-19 fiscal support, exacerbating the demand-supply imbalance that has existed since the early days of the pandemic. Then, we are now experiencing decades-high inflation surges in many countries since the Great Inflation of 1965-1982.

The inflation crisis this time is caused by both cost-push (global supply bottlenecks) and demand-pull factors (pent-up demand for goods and services). As a matter of fact, a few central banks in emerging markets, such as the BRICS group (excluding China) and South Korea, are among the first ones making early moves since 2H21. Despite these hawkish monetary stances, global financial conditions have yet to show significant changes from the super-easing levels.

However, more and more key global monetary policymakers are signaling a remarkable turn in their views of the monetary path in 2022-2023 to cope with inflation concerns. For instance, the FED, the Bank of Canada (BoC), and the Bank of England (BoE) are continuing to do the monetary tightening process.

At the March meeting, the FED is expected to hike the fed funds rate by more than six times in 2022. However, the FED Governors totally reversed their forecast, acknowledging that inflation is likely to last longer and more seriously with: (1) energy prices anchored at high levels due to the increased supply-demand imbalance in the energy market; (2) the housing sector also witnessed a prolonged supply-demand imbalance, accelerating the inflation trend in both prices and rental rates for property assets; and (3) upward pressure to increase wages with a serious labor shortage in the services sector, which is reopening faster than expected.

On the other hand, the central banks of some yet-to-fully-recovered economies, including Japan and the European Union, continue to maintain their ultra-easy monetary policies to be able to support the economy for longer, as consumer demand in these countries is reported to remain weak.

For other economies severely affected by the COVID-19 outbreak in 2H21 and 2022, e.g., ASEAN-5 and China, the monetary policymakers there will likely remain in a dovish stance to stimulate those economies. In the case of Vietnam, Kis Vietnam expects that the policy rate will remain the same or tend to be loosened so that it can harmonize with the massive fiscal stimulus package that is about to be implemented in 2022–2023.

It can be seen that the current global monetary trend is diverging, no longer sharing the ultra-easing trend like in 2020 - 2021. At present, central banks have faced "unknown uncertainties" about (1) the sustainability of the economic recovery; (2) a prolonged inflation shock; and (3) other risks related to a possibly-new and more-dangerous COVID-19 variant and geopolitical tension between Russia and Ukraine, European countries, and the U.S.