Editorial - May 2022


Temps de lecture : min

With a rate hike decided in early May in Australia, even though the country is in the midst of an election campaign, a new recalcitrant central bank has just given in to rising inflation.

Having long played down the reality of sustained inflation, the Reserve Bank of Australia now expects inflation to reach 6.6% in 2022 with underlying inflation of 4.75%.

Further increases are expected.

Apart from Japan, which is sticking to its guns, the whole world has restricted liquidity, except for China and Russia for specific reasons (economic growth and the impact of sanctions). This combination of global monetary tightening (particularly in the United States) and easing in China is reflected in the long-term rates of both countries.

  • For the first time since 2009, US long-term rates have risen above Chinese rates.

This is a major phenomenon, because for several years there have been significant flows into the Chinese bond market, attracted by very high rates compared to the rates of Western countries, thus contributing to the rise of the currency.This crossing of the two yield curves took place in April 2022 and we are already seeing a significant downturn in the yuan against the dollar. Beyond pushing the dollar a little further to high levels, this reversal must be closely monitored.It probably expresses a reallocation of bond flows from China to the United States, but it also reflects the fragility of Chinese growth.

This is making us worry about the fate of Emerging countries, which, apart from Eastern European countries, have suffered less on the stock market than Europe or the United States from the consequences of the Ukrainian conflict and the rise in interest rates, at least for commodity-exporting countries.

« The yuan's decline already seems to be spreading to certain currencies such as the Brazilian real, which has already depreciated by 3% since 20 April 2022 »

Lucile Loquès

Does this reflect a recent fall in industrial commodity prices, or a contagion effect originating in the weakened economic growth of one of Brazil's main clients, China?

In any case, Brazil's central bank has deemed the situation to be sufficiently problematic not only to raise its rates by 100 basis points to 12.75%, but also to announce a continuation of this trend, against all expectations. Rising commodity prices could lead to hopes of the establishment of a virtuous circle for commodity-exporting countries. But rising costs in many sectors and inflation that is spreading are perhaps an obstacle to the long-term establishment of this dynamic.

Written by

Lucile Loquès
Director of the International Actions division

May 20, 2022

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