Page 43 - bne magazine July 2022_20220704

bne July 2022 Special Report I 43
and, over the past three decades, they have established a credible track record of achieving their inflation targets,” the World Bank said in its report.
Most of the central banks of the world have followed New Zealand’s lead and adopted inflation targeting policies that are designed to give the population confidence that the regulator will manage inflation. Once it loses that
grip then “unanchored” high inflation expectations are themselves inflationary.
The three heat map charts show respectively: consumer price inflation, monetary policy rates and real interest rates for countries under bne IntelliNews coverage between January 2020 and April 2022. Before drilling into the details of the data several things are immediately apparent from the charts.
Inflation was generally low across the entire region at the start of 2020 before the pandemic struck, but started to take off between the spring and summer
of 2021. However, it has only really become a very noticeable problem since the start of this year and increasingly
so from March onwards. As of April
all of the countries in bne IntelliNews’ patch of 30 countries have inflation rates in double digits, bar five.
The picture with central bank monetary policy rates is more mixed. In general each country that joined the EU has low rates thanks to the stabilising effect of union membership, while those outside have much higher rates. The trend here was several countries were cutting rates between the second half of 2020 and into the summer of 2021, but nearly
all of them started hiking again in the autumn of that year as inflation took off around the world, largely driven by rising commodity and food prices.
Combining the consumer price inflation and central bank prime rates to get a heat map of real interest rates and the picture is clear. While most countries had positive real interest rates for most of 2020, from the spring of 2021 those rates were starting to turn negative
and the gap has continued to grow in the first months of this year.
Central banks across the region have been aggressively hiking rates, but the heat map suggests that they mostly remain behind the curve and need to hike further, which is why the World Bank is warning that stagflation looms. Negative real interest rates
are a precursor of stagflation.
The growth in negative real interest rates is not out of control yet. About half of the countries in the bne IntelliNews patch still have negative rates in single digits so the central banks there can redress the problem fairly easily. But
in the other half with negative real
rates in double digits the size of the hikes needed to fight inflation has already reached very painful levels.
A few countries are ahead of the curve and seem to have got the problem under control, with the Central Asian states and Hungary ahead of the game. Hungary is one of the few new EU countries that has already solved the problem and has positive real interest rates.
Rising inflation has been worrying central bankers for well over a year now. Central Bank of Russia (CBR) Governor
massive 15% rate hike to 25% on June 2 to head off inflation and stabilise the exchange rate. Hungary has very successfully kept control of inflation after the central bank put through an aggressive 100bp hike on March 22 to hike rates to 4.4%. Hungary’s central bank acted after inflation growth went into double digits in May. the Czech central bank similarly hiked rates by 50bp on April 1 to bring the rate to 5% for the same reasons, but will clearly have to hike further.
Most countries will have to continue to hike rates during the summer. Many are currently suffering from historically high levels of inflation that are stubbornly remaining high, as bne IntelliNews regularly reports
in its data section. Poland has seen an uninterrupted rise in inflation since the end of 2020. Slovakia’s inflation rate is currently at its highest level in two decades and Czechia's
at its highest level since 1993.
The danger of not hiking rates is social unrest. In some of the poorer countries, the soaring cost of living has already led to riots, such as Albania has suffered from in March. The fear is that, as
“Central banks across the region have been aggressively hiking rates, but the heat map suggests that they mostly remain behind the curve and need to hike further”
Elvia Nabiullina was afraid inflation was becoming unanchored before
the war in Ukraine started and ended seven years of easing to put through
a series of aggressive rate hikes at the end of 2021 and early 2022. She more than doubled the rate to 20% days after the invasion of Ukraine started and successfully headed off more inflation; the inflation expectations
of the population rapidly fell six percentage points in May after the hike.
Likewise, the National Bank of Ukraine (NBU) similarly just put through a
bne IntelliNews reported as early as January, when the food crisis caused by Ukraine’s inability to export its grain is coupled with the skyrocketing prices this social unrest will spread further afield, especially in North Africa.
In fact the only central bank that has been able to loosen monetary policy since the war started is Russia, albeit after an extreme emergency hike
in February: the CBR has already cut rates three times, to 17% then 14%, both in April, and then again in May to the current 11%.
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