In the last two months, some of the world’s major emerging economies have started to raise interest rates, such as Brazil, Russia and Turkey some time ago, they started to take a step ahead and raise interest rates. And just two days ago, Russia, which has the 12th largest GDP in the world, once again surprised us by raising interest rates, and by a larger margin, 50 basis points instead of the regular, 25 basis points! Thus, Russia’s benchmark interest rate rose from 4.5% to 5%. This move greatly exceeded the world’s expectations.
(Russian Ruble)
This was Russia’s second rate hike after the outbreak, the last one being on March 19. In other words, there was only a month and four days between the two rate hikes! Why did Russia raise interest rates in such a “hurry”? There are probably two reasons: inflation and the increasingly intense Russia-US game.
There are different reasons for easing all over the world, but most of the reasons for monetary tightening are similar: inflation must be the main reason. Looking at the trend of Russia’s inflation rate, you can see that since May 2020, the year-on-year CPI growth rate has gone up from 3.02% to 5.79% in March this year! That’s nearly double in less than a year, and the inflation tiger is coming on strong.
In contrast, the official CPI increase in March was only 0.4% year-on-year. This deflationary-looking inflation figure is certainly watery; but Russia’s inflation is now at 5.79%, which is on the high side, both in terms of developed and emerging economies.
CPI is the poor people’s index, or livelihood index. CPI is an important indicator to measure the happiness index of the people in a country. Generally speaking, the CPI exceeds 3%, the people will feel the pressure of survival, which will affect the “legitimacy” of the ruling. And now that Russia is close to 6%, it is necessary to raise interest rates from any point of view.
The rich don’t feel much about CPI, but they feel strongly about the year-on-year growth of M2, because it is related to their smooth borrowing and their investment. So the year-on-year growth rate of M2 is an index of the rich. Russia’s broad money M2, from March 2020 to February 2021, increased by 11.2%. Although the rate of money printing is less than half that of the US, it is more than 1 percentage point faster than China and cannot be considered slow.
Russia’s economic structure is relatively homogeneous, silly heavy industry is okay, but light industry is not at all, and many necessities have to be imported, which is prone to imported inflation. What’s more, the current situation in eastern Ukraine is very tense, although Russia has temporarily withdrawn its troops, but this powder keg still exists objectively! And the game between the United States and Russia has reached an unprecedented level of intensity. The two sides keep sanctioning each other, even to the stage of expelling each other’s ambassadors. Moreover, some countries in the EU and Russia are also expelling each other’s ambassadors, and Russia is facing unprecedented pressure from the US and the EU.
It is conceivable that if war breaks out in eastern Ukraine, the U.S. and Europe are bound to further sanction Russia economically, and in fact such sanctions have been in place since Russia’s annexation of Crimea in 2014. If the U.S. and Europe impose further sanctions, then hot money will flow out of Russia at an accelerated rate, the Russian ruble may have to stage another big dive, and asset prices such as the Russian stock and property markets will collapse again. In order to prepare for the future violent fluctuations in the financial market, Russia also has a reason to raise interest rates in advance, to digest the shortfall in stages, to prevent capital outflows on the impact of the country’s asset prices, being woolly. This is the reason why Russia suddenly raised interest rates for the second time, and it was a significant increase. It can be said that the interest rate hike may not be able to escape this calamity, but not to raise interest rates is certain to escape. These two expressions we can speculate.
Looking ahead to the next 1 to 2 years, Russia may also continue to raise interest rates in order to curb inflation and stabilize the value of the ruble’s currency. In fact, several countries have raised interest rates since the great epidemic currency release. In addition to Russia, there are Turkey and Brazil, basically in March to April of this year. It has been said many times before that the era of the loosest global monetary policy is over. China has not formally raised interest rates, but it has in fact raised interest rates on loans by controlling the incremental amount of money in the market, albeit moderately. We can clearly see this from the growth rate of broad money M2 and the stock of social financing in China.
On the US side, the Fed will not raise interest rates during the year, but some of the easing policies introduced under the epidemic are no longer postponed. For example, the Supplemental Leverage Ratio (SLR) relief was not renewed after it expired on March 31, which amounted to a partial withdrawal of the currency. on April 21, the Bank of Canada also made a sudden change of heart, announcing that, in light of the strong economic recovery, the Bank of Canada will lower the size of its weekly Treasury purchases to C$3 billion from the current C$4 billion, and may raise the key benchmark interest rate as early as next year, instead of the previously stated The Bank of Canada will not take any action until 2023. This is the first developed country central bank to reverse its stance and is therefore quite a milestone.
Last Thursday, U.S. stocks fell significantly. Subsequently, global digital currencies also fell sharply, with Bitcoin even falling below $50,000 and hundreds of thousands of people worldwide blowing up their positions because of their investments in digital currencies. The market once attributed the cause to – Biden’s plan to raise taxes. But the truth is that Biden’s tax hike plan will be difficult to pass and will end up with a large discount. The real reason for the decline may be the turn in global monetary policy.
At present, the market generally expects that India, Thailand, Malaysia, South Korea and other countries, there is also the possibility of interest rate hikes this year. If there is a new wave of interest rate hikes, it will certainly have a greater impact on the global capital market. For U.S. stocks and A-shares, we still maintain our previous view: the second and third quarters will be spent in repeated shocks, with fewer opportunities to make money and more opportunities to lose money. Whenever there is a large single-day increase in individual stocks or the broader market, it is often an opportunity to pocket the money.
After all, there is the Fed’s tapering panic in, unless there is a full adjustment, it is difficult to see the opportunity to make money.
Recent Comments