Total video player for windows1/15/2024 ![]() This is about a credible shift in thinking that keeps policy rates higher than markets have become used to since the 2008 global financial crisis.Total Video Player is a powerful full-featured HD media player, supporting 1080p, 3gp, Mp4, H264, Mov, Flv and all other popular video files together with any audio formats (Mp3, Wma, Ogg, Mpeg-1,Mpeg-2, etc.) as well as DVDs and CD Audios. But that is unlikely to be the whole story. Lower inflation will contribute to positive policy rates. The last thing the world economy needs is a return to cheap money. ![]() It also contributed significantly to the recent bout of inflation. That thinking has been at the heart of the problems we have seen.Ĭheap money led to asset price inflation, to markets not pricing properly for risk and to a misallocation of capital. But an R-star of close to zero is a policy outcome that reflects deeply flawed thinking because of the distortions that arise from cheap money. So if inflation settled at 3 per cent, policy rates would be 3 per cent. Before the pandemic there was agreement that R-star, the real neutral rate of interest that is consistent with stable economic conditions, was zero in most western economies. A 1977 article by economist Bob Rowthorn seems relevant now, highlighting the conflict between workers and owners and how they anticipate inflation and react.Īlso, markets are mindful of the group thinking that has characterised central banks. ![]() Two of these four are changing, with globalisation replaced by fragmentation and wage shares rising. Perhaps this should now be 3 per cent.įor a quarter of a century, inflation has been low because of globalisation, the squeeze on wage shares, financialisation and technology. It kept expecting inflation to return to its previous higher levels globally. Then I was in a small group of economists who believed we were moving to a new era of low inflation and was struck by how long it took market thinking to adjust. When the inflation environment changes, expectations can adjust slowly. It is quite possible that inflation in many western economies, including the US, euro area and the UK, may settle at a higher level than before the pandemic, and above the 2 per cent where markets always seem to expect inflation to return to. If so, expect more policy pressures and market volatility. Markets may thus no longer be able to rely upon monetary policy as being the inevitable shock absorber, where rates are cut in response to economic weakness or financial stress. This is in addition to central banks shrinking their balance sheets. Future monetary policy neutrality points to the need for real positive interest rates. The second key issue warrants more attention. So further rises look likely, with recession possible. In contrast, the Bank of England lacks any credibility and so has not been able to pause. The Fed’s credibility allows it to pause. But it will raise rates if its aggressive tightening to date does not curb core inflation. There is considerable policy tightening in the pipeline that will slow the economy. Rising inflation expectations and tight labour markets are feeding wage growth and companies appear able to pass on higher costs, thus maintaining or boosting profit margins.ĭespite criticism, the US Federal Reserve was sensible to pause. However, second-round inflation effects are feeding into core inflation in economies such as the UK. The initial drivers of this global inflation bout have been reversed, namely supply-side factors and lax monetary policies. The persistence of core inflation is keeping central banks in the west cautious. It has seen inflation ease to a 25-month low of 4.25 per cent but policy is on hold. While many countries are likely to have seen policy rates already peak, central banks are reluctant to signal easing. The UN’s measure of food prices is 22.1 per cent below its March 2022 all-time high.Ĭhina, which maintained a prudent monetary policy during the pandemic, has just eased and is likely to cut its reserve requirement ratios for banks again, providing liquidity. ![]() Globally, headline inflationary pressures are easing. Tightening through higher policy rates could end soon. One is where rates will peak and whether central banks have done enough to curb inflation. The end of cheap money is the dominant issue, driven by the need to restore anti-inflationary credibility to policy. Markets will need to factor this in fully. Not now, but once we see where core inflation settles. That is, policy rates will need to remain higher than inflation for some time. There needs to be a prolonged period of positive real interest rates in western economies. The writer is chief economic strategist at Netwealth ![]()
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