PART 1 The Economy

R E S E T 2 0 2 2

PA R T 1 : T H E E CONOM Y

INTEREST RATES

Rising inflation has forced central banks to act both earlier and more aggressively than previously envisaged. The U.S. Fed lifted rates by 75bps in June (the first of such a level since 1994) following a 50-basis point rise in May. Simultaneously the bank has also signalled the beginning of the reduction of its balance sheet (quantitative tightening). These measures are squarely aimed at reigning in rampant inflation – a distinct change from the recent past when rate hikes were targeting policy normalisation while trying to push inflation higher but without hurting the labour market. In this vein further rate hikes will follow. Where the U.S. Fed has led, others have followed albeit once again at varying speeds. Within Asia Pacific, central

banks in New Zealand, South Korea and the Monetary Authority of Singapore led the pack, with rates rising by up to 175bps so far in this tightening cycle. In recent months central banks in India and Australia have joined their ranks, with both lifting interest rates earlier and more aggressively than their recent commentary would have suggested. In the past two months the RBI has lifted a cumulative total of 90bps, while the RBA has lifted 125bps from May to July. Likewise, the Philippines also moved policy rates higher for the first time in years and Bank Negara Malaysia has also made two consecutive 25-basis point hikes. In contrast, the PBoC is facing a different challenge. Inflation is comfortably below

transitory but rather that they are more entrenched and so require swifter action. Of course, this requires a balancing act of being aggressive enough to curb inflation but not so aggressive as to blunt the post COVID economic recovery. Confidence remains key here and it is clear that both consumer and business confidence has taken a hit of late. Notwithstanding, consumers are continuing to spend at least for now and many markets continue to record positive real sales volume growth, both year-on-year and quarter on-quarter, though as the effects of interest rate rises take hold the level of growth is expected to slow. These remain key indicators to watch as central banks progress further into the tightening cycle.

the 3% target rate, but economic growth is facing increasing headwinds. The ongoing zero-COVID policy pushed Shanghai into a lockdown, dramatically curbing economic growth. Restrictions are now easing, which should provide a boost, but this may not resolve issues associated with a sluggish property market and relatively weak domestic consumption. The PBoC has therefore become more accommodative in its approach and further easing is likely over the remainder of the year in addition to the Government’s recent tax relief package. For the rest of the world, it’s clear that central banks no longer subscribe to the thesis that inflationary effects are

FIGURE 4: CONSUMER CONFIDENCE (NEUTRAL = 100)

110

FIGURE 3: CENTRAL BANK POLICY RATES 2010-2025

108

10%

106

9%

104

8%

102

7%

100

6%

98

5%

96

4%

3%

94

2%

92

1%

90

0%

-1%

AUS

CHN

EA19

UK

JPN

KOR

NZ

US

Australia

Mainland China

India

Japan

South Korea

New Zealand

Singapore

US

Euro Zone

UK

Source: OECD, Cushman & Wakefield

Source: Moody’s, Cushman & Wakefield

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