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Currencies
Opinion
Neal Kimberley
Neal Kimberley

Macroscope | Why China is seeking a weaker yuan as the US and UK take a more hawkish monetary policy stance

  • The Fed and Bank of England tilt is in stark contrast to the dovish tone from Beijing, where recent People’s Bank of China decisions suggest to currency markets that officials would rather not see the yuan continue to strengthen

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Workers unload a truck in front of the People’s Bank of China, in Beijing on December 13. Economists predict China will start adding fiscal stimulus in early 2022 after the country’s top officials said their key goals for the coming year include counteracting growth pressures and stabilising the economy. Photo: Bloomberg
Neal Kimberley

In the face of rising inflation, both the Bank of England and the US Federal Reserve took action last week. These tilts towards a more hawkish monetary policy stance are in sharp contrast to the dovish tone emanating from the People’s Bank of China (PBOC), and there could be profound implications for the yuan.

In the Bank of England’s case, policymakers voted on December 16 to raise the benchmark interest rate by 15 basis points to 0.25 per cent. They did so despite acknowledging there was uncertainty about the future impact on Britain’s economy of the spread of the Omicron variant of Covid-19.

The rate-setting committee felt that, with the British jobs market already tight, the rise in the UK consumer price index (CPI) in November to 5.1 per cent on an annualised basis – its highest level in more than a decade – justified the rate increase.

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A day earlier, the Fed also pivoted towards a more hawkish monetary policy stance, albeit without actually raising US interest rates. Influenced by the 6.8 per cent year-on-year rise in US headline CPI in November, a level not seen since 1982, the Fed opted to accelerate the pace at which it will wind down its monthly asset purchase programme while simultaneously raising the prospect of three 25-basis-point rate increases next year.

It remains to be seen whether the UK rate increase or the Fed’s decision feed through into something more than passing support for the British pound or the US dollar.

But how those currencies react in an end-of-year market might prove less important than the impact the change in policy at both the Bank of England and the Fed has on the collective consciousness of the foreign exchanges as 2022 commences.

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