UK Hikes Rates, US Plans to Follow Suit
- 2024-05-18
- News
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A once-in-a-century great transformation, if reflected in the struggle within the financial realm, then a shift in financial policy could largely signify that a crucial turning point is about to emerge. And that's precisely the situation we're in now, as the United States' massive monetary easing is about to come to an end, with a shift towards tightening expected next year.
The U.S. has already begun to double the pace of reducing its bond purchases, and at this rate, preparations for interest rate hikes could commence by March of next year. The UK, even more impatient, has officially announced an interest rate increase of 0.15%. Do not underestimate this small step; it is a giant leap in the transformation of financial policy.
At the onset of the pandemic last year, the U.S. took the lead in massive monetary easing, with the EU and Japan following suit. Essentially, these Western developed countries all marched in step with the U.S., easing when the U.S. did. Among the four major economies, only we did not follow suit.
Now the question arises: many argue that we should lower interest rates and significantly loosen monetary policy, while the U.S., along with its allies, is preparing to raise interest rates and tighten. Can we still lower interest rates at this point? Let's consider what has happened recently in Turkey, which has lowered interest rates.
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Turkey's Experience
Turkey has been lowering interest rates in the second half of this year and has now become the laughing stock of the world. Why? Because their president claims that raising interest rates is the cause of inflation and has called for maintaining low interest rates to stimulate economic growth. As a result, the central bank governor who had previously raised rates to control inflation was dismissed.
Indeed, Turkey was significantly raising interest rates in the first half of the year, increasing them by 2% at a time, pushing the rate from 17% to 19%. The reason for such a drastic increase was due to severe inflation, and the traditional method is certainly to control inflation through interest rate hikes.
Isn't the U.S. also preparing to raise interest rates to control severe inflation? So, Turkey's previous approach should not have been problematic. It just didn't align with the president's thinking. Consequently, in the second half of the year, Turkey unexpectedly began to lower interest rates, reducing them from 19% to the current 14%.
Erdogan apparently doesn't believe in conventional wisdom. I've heard a theory that capital is flowing out of Turkey, and Erdogan's thinking is that instead of watching the country be drained, it's better to lower interest rates in reverse. This would certainly lead to a significant devaluation of the Turkish lira, and in doing so, the lira would devalue all at once, leaving no room for escape.
Does this theory hold water?In theory, after the Turkish currency depreciates against the US dollar in one go, any further outflow of US dollar capital from Turkey would indeed face significant losses. However, it seems that the loss is confined within the country, and in reality, there are several significant side effects. If these side effects are not well controlled, it could easily lead to serious problems.
The first side effect is the loss of control over inflation. When the domestic currency depreciates, the cost of imports increases. If there is a significant need to import energy, food, and other basic materials, a substantial devaluation would lead to imported inflation.
In fact, Turkey's inflation is already on the brink of being out of control. The interest rate hikes in the first half of the year were mainly due to inflation caused by rising prices of external commodities. In the second half of the year, coupled with the depreciation of its own currency, inflation soared to more than 20%.
The second side effect is the expectation of further depreciation. The US is raising interest rates, while Turkey is significantly lowering them; it's clear that the US dollar will flow out massively, causing the domestic currency to depreciate sharply. Depreciation leads to intensified inflation, rising prices, and devaluation of money. Naturally, people would think of exchanging lira for US dollars to preserve their value.
This is more terrifying than the outflow of US dollar capital because it can create a trend. If everyone starts exchanging for US dollars, Turkey's foreign exchange reserves would not withstand such an impact, leading to a run effect. At this point, the only option would be to close exchange channels and restrict the exchange of US dollars.
Such actions would further erode people's confidence, and the financial system would face collapse without external pressure.
Therefore, lowering interest rates and currency depreciation are not as good as they sound. Does Erdogan not have this common sense? Obviously not; he is choosing the lesser of two evils. Since it's a cut whether he sticks his neck out or not, he might as well take a gamble, stir up domestic populism, divert the conflict, and let everyone forget the hardships of life and face the difficulties together.
Why is Turkey in such a difficult situation? Why must it suffer no matter whether it sticks its neck out or not?
What should be considered when lowering interest rates?
Essentially, Turkey is within the economic system dominated by the US, following the US financial cycle. When the US thrives, you can share in the benefits, but when the US tightens, if it wants to eat meat, you have to cut your own flesh. Turkey does not want to be so easily slaughtered, but given its own conditions and position, can it really have a say in this matter?So looking at the current situation, the United States is accelerating its contraction efforts, the European Union is reducing its bond purchases, and the United Kingdom has already taken the lead in raising interest rates. All these actions are in line with the financial rhythm centered around the US dollar. But does Turkey have a choice? It may seem capricious, but the real reckoning has yet to begin.
What warning does this give us? For a country's financial policy to be independent, it must have an independent economic system.
Many economists nowadays are hoping for interest rate cuts. However, with the UK having already raised rates and the US preparing to do so, can we afford to cut interest rates? Firstly, it's important to note that we have no comparability with countries like Turkey in terms of economic scale and depth; they are not in the same league. Both lowering and not lowering interest rates indeed have their justifications.
But I believe that whether to cut interest rates or not, the most critical factor is to look at what the main contradiction will be next year.
If the main contradiction next year lies internally, for instance, if the economic growth rate declines significantly, affecting the national economic security, or if the real estate market is greatly impacted due to monetary policy, and if the primary need is to stabilize these internal issues, then an interest rate cut would be a primary option to consider.
However, it's also important to note that against the backdrop of US interest rate hikes, our rate cut would widen the interest rate differential between the US and China. This could exacerbate the outflow of dollars and lead to certain depreciation pressures. At this time, depreciation is not the issue; the problem is that it would increase the pressure of imported inflation.
Last year, when the US was flooding the market with liquidity, we resolutely did not follow, and the main problem we faced was that international commodity prices were driven up by the dollar. This year, our main pressure lies here, with PPI increases being too rapid and too high.
If next year the dollar continues to tighten while the US continues to push up food prices, then the problem will be that CPI will also rise. Coupled with the already high PPI and the imported inflation pressure brought by depreciation, the supply shock next year is indeed not a small matter.
If we decide to cut interest rates, these are the scenarios that must be considered.
If the main contradiction next year is external, that is, if we are strictly guarding against the US using dollar tightening to carry out financial harvesting, then we must be extremely cautious in our financial policies and should not easily cut interest rates. As mentioned earlier, cutting interest rates would essentially exacerbate this contradiction, thereby significantly increasing external risks.So, whether to lower interest rates or not depends on the main aspect of the contradiction in the short term, focusing on internal or external factors? If the focus is on internal factors, there must be a risk preparedness for the intensification of external contradictions. The reverse is also true, but with a slight difference, we still have room for structural adjustment internally.
My analytical framework has always focused on external games, so looking at the issue from this perspective, it is definitely felt that it is not suitable to lower interest rates at present. As many people have said, our financial cycle is indeed out of sync with the United States in terms of rhythm, but this is just a superficial phenomenon.
Essentially, the most critical point is that the economic system is still integrated. For example, Turkey belongs to the financial system and the economic system is completely subordinate to the United States-led system. To establish its own system within this system, in addition to subjective wishes, objective conditions must also be considered.
Our difference lies in the fact that, for the time being, we have preliminarily become independent from the U.S. dollar financial system. The most critical point is the issuance of currency, which is no longer in the form of foreign exchange deposits but has basically achieved autonomous needs.
However, on the other hand, in the economic system, everyone is still eating from the same pot, and it cannot be said that there is no influence between each other. It is certainly easy to say that monetary policy should be based on ourselves. But financially, we are already on the defensive. In this key period of dollar tightening, it can be said to be a special period, and risk prevention should be the top priority.
Since the beginning of this year, at least 28 countries around the world, including Russia, Mexico, Venezuela, Poland, and Brazil, have raised interest rates one after another.
At the end of September, the Central Bank of Norway also announced an increase in the benchmark interest rate. On November 24, the Reserve Bank of New Zealand raised the benchmark interest rate by 25 basis points. On November 25, the Bank of Korea announced an increase in the benchmark interest rate from the current 0.75% to 1%. On December 16, the Bank of England suddenly announced an interest rate hike, raising the benchmark interest rate by 15 basis points to 0.25%.
Starting from the countries on the periphery of the world economy to the current interest rate hike in the United Kingdom, the world has inevitably entered the financial rhythm of the United States, but the United States has not yet started to exert its strength. At this time, if we go against the trend, the pressure of capital outflow will be relatively large.
So, looking at it from the external environment, interest rate cuts should indeed be cautious.
Timing selectionThe first half of the dollar tightening is primarily characterized by the repatriation of dollars. In the latter half of the dollar tightening, it's about creating a global liquidity crisis, which is necessary to burst asset bubbles in various countries. Only in this way can there be a simultaneous occurrence of plummeting asset prices and debt crises, which is also the prerequisite for international capital to ultimately bottom-fish.
By the time the dollar tightening reaches its latter half, the repatriation of dollars has largely been achieved. Under the premise of tightening capital controls, we can begin comprehensive easing to hedge against this final, most brutal contraction, ensuring that there will be no asset price collapse or debt crisis domestically.
How is the first and second half of the dollar tightening judged? According to historical experience, the most significant indicator is a sharp decline in the U.S. stock market. The U.S. stock market acts as an amplifier when dollar capital flows out of the United States. In the first half of the dollar repatriation, most dollar capital, driven by safety and profit considerations, will still enter the U.S. stock and bond markets.
This is equivalent to taking over at high levels. The main feature of the first half of the dollar tightening is that, globally, dollars continuously repatriate, and the U.S. dollar index keeps rising. At the same time, the U.S. stock market still has a strong money-making effect, attracting these repatriated dollars to continuously enter the U.S. stock market.
In the latter half of the dollar tightening, the initial repatriation of dollars has been largely completed. The most important thing is to create a liquidity crisis by deleveraging, thereby triggering a financial crisis. The main focus of deleveraging will be on the U.S. stock market. As long as the U.S. stock market continues to plummet, leveraged funds will need to continuously replenish collateral or liquidity.
At this time, the first consideration is often to frantically sell off the most easily liquidated assets around the world, which is to withdraw from stock markets in various countries. This is the key for the U.S. stock market to bring down the global capital market. At this time, liquidity crises will occur in various countries. To avoid this situation, comprehensive easing must be carried out to release liquidity to hedge against this liquidity crisis.
As long as this wave is resisted, there will be no subsequent financial crisis and debt crisis brought about by the big collapse, and there will be no dollar capital turning around to bottom-fish.
Finally, there has been a lot of talk recently about whether to lower interest rates and under what conditions to lower interest rates, mainly because it has a key impact on the internal and external game situation next year. But overall, that's about it. The most hopeful for interest rate cuts domestically should still be real estate-related enterprises.
For most other industries, the main issue is not whether to lower interest rates or whether to ease, but fundamentally a structural adjustment issue. Today's water release can prolong your life, but you can't rely on this for eternal life. In the final analysis, internally, it's just a matter of interest distribution, while externally, it's a matter of life and death.
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