China ‘ahead of US’ in monetary policy adjustments, as US Fed revamps interest rate predictions
- Chinese financial officials have long talked about spillover effects from US Federal Reserve policy moves – such as pressure on the yuan exchange rate
- US Fed policy tends to impact the global forex market and cross-border capital flows, and Beijing paid a hefty price in the last cycle of rising interest rates
Economists say China is better positioned than it was in the past to handle “external challenges”, after the US Federal Reserve overhauled its economic and monetary policy predictions in its just-concluded policy meeting.
The Fed’s so-called dot plot – a chart showing when each member of the Federal Reserve’s policymaking panel expects the central bank to change interest rates – implies that hawkishness is on the horizon, with two projected interest rate hikes by the end of 2023, according to a statement released by the policymaking Federal Open Market Committee on Wednesday in Washington.
While keeping its benchmark rate and its US$120 billion-per-month quantitative easing asset-purchasing programme unchanged for now, the Fed said it would be prepared to adjust its monetary policy as it balances various risks in the coming months, particularly with inflation rising in the United States faster than expected.
“It has formed a consensus on tightening. The only difference is the timing, not the direction,” said Cheng Shi, chief economist at ICBC International. “The more-hawkish-than-expected adjustments raise the curtain for de facto monetary policy normalisation in the US, or even the whole world.”
Chinese financial officials have long expressed concern about spillover effects from expansionary US monetary and fiscal policy – such as the pressure it puts on the yuan exchange rate, capital flows and cross-market contagion risks – and the painful reactions in some emerging markets, such as unexpectedly large interest rate hikes in Russia, Brazil and Turkey.
“It may also drive up risk-off sentiment,” he added, referring to when traders and investors reduce exposure to market risks in an effort to protect their capital.
The People’s Bank of China, which says it has implemented a “normal” monetary policy, was silent on Thursday over the move across the Pacific.