Three to zero five, but the effect is different – Newspaper Kommersant No. 234 (7435) of 12/16/2022

After raising the discount rate of the US Federal Reserve, other major central banks took similar steps: the European Central Bank (ECB) and the Bank of England raised the rate by the same 0.5 percentage points. Markets are now being played against by assessments of regulators’ rhetoric both as not tough enough and as too tough: the general desire to raise rates further to fight global inflation at least increases the period of weak demand in the largest economies and increases the likelihood of them entering a recession, and all this is tied to uncertainty about China’s GDP growth and production growth prospects.

Surprises from the ECB and the Bank of England in response up on thursday The US Federal Reserve could not have set a discount rate of 0.5 percentage points: on Thursday Bank of England and Council of the ECB made similar and fully expected decisions. The difference between the three rate hikes and the reaction of the markets to them is not in the logic of decision-making (in 2022, the central banks of the world, who previously practiced “non-standard” monetary policy, returned to the standard neo-Keynesian logic), but in the nuances of the rhetoric of regulators and in the fact that The situations in the economies of the US, the UK and the euro area, despite the similarity of the main problem that needs to be addressed (high inflation that so far exceeds the forecasts for the summer of 2022), nevertheless differ.

First of all, the discrepancy between the reactions of the British pound and the euro to the decisions made is interesting – with similar inflation targets. The pound after the announcement of the Bank of England on raising the base rate to 3.5% per annum (the ninth in a row – to a record level since 2008) confidently, although slightly cheaper, British stock indices declined. In turn, the euro at the time of the press conference of the head of the ECB, Christine Lagarde (the new rate level is 2.5% per annum), rose slightly against the US dollar, although the stock markets were still declining. The dollar (rate from December 15 – 4.5% per annum) strengthened the day before, stock indices stagnated. Rather, the difference lies in the fact that the Bank of England showed slightly less than the ECB and the Fed, the mood for further (recognized as inevitable in all three cases) tightening of the monetary policy. In the statement of the Bank of England, it is rather considered as minimal, but conditional (if events develop according to the forecast of the November report of the regulator, the rate will continue to rise). The Fed’s position is that the rate will remain high until there is complete confidence in the reduction of inflationary pressure. Finally, the position of the ECB is that the rate in the euro area should be higher than market expectations for inflation.

Similar decisions amplify similar risks: there is little doubt that the actions of the three regulators can return inflation in the US, EU and UK with a lag of months on trajectories declining to 2% per annum (expectations in economies remain more or less anchored around this indicator ), the only question is how much it will cost in terms of GDP and unemployment.

The UK is already in a shallow recession, the issue of a recession in the euro area is debatable, in the US it is unlikely. However, what is happening has an important component: the high role of foreign trade for all three economies makes the recession in them dependent on the situation in the Chinese economy: its low growth in 2023 will not equally affect the three jurisdictions, and it is not known who will suffer more and on what time horizon more — the US (quickly and through trade-related channels), the UK (a more fragile economy after Brexit) or the EU (less dependent on China, but more heterogeneous and vulnerable as an indirect participant in the Russian-Ukrainian armed conflict).

Dmitry Butrin