There are very few outliers to the global inflation and monetary adjustment phase that we are currently enduring. The variation between nations is largely limited to what phase of the adjustment they are in. The spectrum ranges from the ECB or BoE’s catch-up meeting-by-meeting hikes, to the Fed’s let’s take a break, all the way through to Canada’s we had a break, let’s do more. There are outliers, note Japan’s blinkered ‘what inflation’ approach with policy rates holding in negative territory at -0.1%. However, never having adjusted policy in the face of rising global and domestic inflation, even Japan’s inclusion doesn’t capture those nations that have come through their tightening cycle and are now pursuing monetary policy easing.
There is really only one economically significant economy that falls confidently into this category: China. China over the past few days has cut the rate on its reverse repo operations, making financing conditions easier. It had also cut several other major policy benchmarks it uses in order to influence financing conditions. The adjustment size has been underwhelming, with an average of around 10-basis points of easing within these major policy benchmarks. However, these adjustments push further an easing cycle that began at the beginning of 2022.
China is easing policy in order to boost demand in the face of underwhelming growth and wider economic statistics. Due to the threat to growth in China and the economy’s significance to global demand, we have seen reaction within global asset markets as a result of the perception of below-expected levels of monetary intervention. Many analysts have notably attributed softness in the oil market and other benchmarks of global demand to underwhelming policy adjustment in China. Should we enter a macro environment characterised by growth concerns, as appears likely, the framework for FX analysis will shift.
Discussion and Analysis by Charles Porter
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