Previously published on October 10, 2022 in
Forbes Logo - PNG and Vector - Logo Download
By Milton Ezrati, Chief Economist at Vested

While inflation concerns have driven western central banks to raise interest rates, China is leading Asia in the opposite direction. All – east and west – worry over recession, but the Federal Reserve (Fed) the European Central Bank (ECB) and other western bankers has taken the lessons of the last great inflation of the 1970s and 1980s that it is worth the risk of recession to quell inflation as quickly as they dare. China’s central bank, the People’s Bank of China (PBOC), faces a very different set of pressures. Confronted by with much less intense inflationary pressure than the west and extremely concerned about the nation’s poor economic prospects, PBOC has cut interest rates, albeit only marginally, and otherwise eased monetary policy.

In the west, the Bank of Canada has taken the lead. Since March it has raised its target overnight lending rate five times for a total of three full percentage points. These rates are higher now than any time in the last 14 years. The Fed also has made a similar commitment. Since U.S. monetary policy makers finally awoke to the inflationary threat last spring, they have raised the target federal funds interest rate target some three percentage points to a level of 3-3.25%. The Fed’s open market committee (FOMC) is expected to raise rates still farther in coming months.

More recently, the ECB has joined in this trend. Reluctant to raise interest rates earlier in the year for fear of recession, European policy makers have at last acknowledged the need for monetary restraint, raising their target short-term interest rate some 0.75 percentage points. Although their target, at about 1.25% remains well below American rates. ECB policy makers have promised further hikes along these lines to catch up with their cousins in North America.

The ECB had to overcome a lot of concern to step up to this new policy. Unlike North America, the economies in its jurisdiction are nowhere near full employment, and with energy shortages threatening, the prospect of economic decline is much more real than on this side of the Atlantic. But the growing interest rate differential had attracted money from Europe to American so that the euro fell almost 10% against the dollar, and policy makers could see an added inflationary potential in that move. They were also well aware that had they failed to act against inflation, businesses and individuals would come to expect it and thereby make it ultimately harder to control.
China has had to steer a very different course. Its bankers are under a lot less pressure to act than the western economies. Its inflation to be sure has risen – from 0.9% last February to 2.7% in July, the most recent period for which data are available. Despite the rise, this is a lot less frightening than the 8-9% rates of inflation in the west. Besides, it is not much above the 2.3% a year averaged by Chinese inflation over the last 20 years. Indeed, it remains below Beijing’s official 3.0% ceiling. More telling on policy makers, however, are the real economic impediments facing China. The lockdowns and quarantines used to combat Covid have already put Chinese growth below target, and some of those constraints remain in place. China also faces the effects of drought, a heat wave, power shortages, and the lingering effects of last year’s failures in the property development sector. China might well face recession and surely will miss its already-reduced real growth target of 5.5%.

Recent Case Studies

Back To Blog