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Podcast: the ‘global unsyncing’

Financial-cycles

Business and financial cycles follow expansion, peak, recession and recovery phases. During the low interest rate environment following the global financial crisis that began in 2007–08, many nations worldwide were in the expansion phase. 

The S&P 500 continued rising until the end of 2021, while the real economy faltered. The US Federal Reserve policy rate has such a gravitational pull that its interest rate increases pose a dilemma for emerging market nations. Interest rate hikes by the Fed cause capital flight away from emerging markets, limiting GDP growth. 

As the currency values of emerging market economies decline against the strengthening dollar, this further increases inflationary pressures. Central bankers in emerging markets must choose whether to raise with the Fed, thereby further risking recession, or keep an accommodating monetary policy but risking contributing to inflation, which, for many, is also exacerbated by external price shocks in food and energy commodities markets.
 
The 'global unsyncing' can be viewed in terms of the financial and business cycles separating, as well as advanced and emerging economies following different paths as the Fed hikes.

Central Banking welcomes back Diana Dengo, investment director at Wellington Management, to discuss this phenomenon. 


"There have been a total of 280 global interest rate hikes this year," Dengo says, speaking on December 15.  "That's the equivalent of more than one for every trading day." Meanwhile, global government bonds are down 22%, the most since 1949, she says.

To Dengo, what is interesting is how different countries and regions are going to respond to that slowdown in an environment where inflation is still high.

"On the one hand, we've seen some countries slow or pause interest rate hikes, generally focusing on prioritising growth and, in some cases, financial stability over inflation," Dengo says. On the other, "we've seen a greater willingness to sacrifice short-term growth in order to keep a lid on inflation".

Dengo speaks about how volatility adds an additional layer of complexity to the ongoing challenge central banks face of timing monetary policy decisions, given lags in monetary policy transmission. 

Index

0:07 Introduction

1:41 How quickly do the Fed's interest rate hikes filter into markets, and what is their effect? 

3:27  Risks other central banks must weigh when making monetary policy decisions

5:32 What the global unsyncing means for reserve managers

7:01 The consequences of business and financial cycles unsyncing

10:29 The complexity volatility adds to the challenge of timing monetary policy transmission

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