Guy Beit-Or, Chief Economist of Psagot Investment House
20/12/2021
This past week has certainly been one of the busiest we remember whether it’s dramatic interest rate decisions, fears of Omicron leading many countries around the world to continue quarantining ahead of Christmas or the systematic destruction we see President Erdogan doing to the Turkish economy.
On top of all that, the distress in China’s real estate market continues and energy prices in Europe are soaring again amid rising tensions between Russia and the West – last week US President Biden urged Europeans to reach agreement on a series of sanctions in case Russia invades Ukraine. Another little thing about China, the United States on Thursday announced a series of new sanctions on more than 30 companies and research institutes in China over human rights violations and the development of military technologies to control populations. And if all these events that happened only in the last week are not enough, in Israel the consumer price index has also been published, which continues to deceive everyone.
If we try to focus on the two most important developments in the last week, these are first and foremost the dramatic change of central banks in the direction of monetary cuts and interest rate hikes, and secondly the risks to economic activity due to global governments’ response to rising morbidity. .
First the central banks In recent weeks, it has become clear that the problem of inflation that exists in the world today is not “temporary.” True, it has temporary components that are also likely to accompany us deep into the next year like the energy crisis and the ongoing disruption in supply chains. But if global inflation were only the result of these temporary supply factors, we would not see central banks doing so.
Clearly, banks have changed their priorities and raised the war on inflation to the first place despite the risks to global economic activity due to the constraints imposed by Omicron and the expected damage to supply chains. In fact, the central banks of the United States (Fed) and the United Kingdom (BOE) have warned in the past week that restrictions on activity are likely to have only a moderate effect on the economy, but with greater risks of inflation through additional “market” supply chains.
We must note, however, that the focus on supply chains has diverted us from the real problem, which is the fact that over the past two years central banks in concert with governments have poured unprecedented amounts of money into both stock markets and directly into citizens’ pockets.
We are already used to the volume expansions that support the stock markets – this has been the recipe since 2008 when at any sign of the problem, the central bank (any central bank, whether it is the US, Europe, UK, Japan or any other central bank) comes to the rescue while maintaining interest rates Low and high wealth effect (through capital markets) It was easy for the central bank as there was no price to pay – there was not really inflation.
But today, the situation is completely different and high inflation is partly due to the combined policy of high deficits used to transfer funds to the public (because they closed everyone at home) while relying on the central bank for financing. The result? High and simultaneous demand from many households around the world for products has led to a spike in prices and shortages. In addition, real estate markets are burning all over the world, not only in Israel and wages are soaring throughout the developed world, but also in Israel. These two factors – Wages and the burning real estate market are the main factors that are expected to make inflation so temporary..
And so, last week we saw the Fed signal for at least 3 rate hikes next year and an end to the quantitative easing program soon. In fact, over the weekend one of the Fed members raised the bar even further when he said that raising interest rates already in March is definitely on the table. And in the UK we saw the central bank surprising everyone with a rate hike when the ECB also announced a gradual reduction in quantitative easing plans. In addition to these, interest rate hikes have also been recorded since the beginning of the month in Poland, Brazil, Hungary, Chile, Norway, Russia and Colombia. There is one country that has lowered interest rates, Turkey where inflation is rampant at an annual rate of 21.3%, but interest rates have been falling continuously since August leading to the collapse of the Turkish lira in particular and the Turkish economy in general – but that’s a story for another column …
Where is Israel in all this turmoil? Relatively quiet. The November index has been downward for the second month in a row and although there are quite a few inflationary pressures being built up in Israel, it is still difficult to see them prominently in the consumer price index, which has risen by 2.4% in the past year. The Bank of Israel has already made it clear that it is in no hurry to change policy as long as it does not see inflation and inflation expectations exceed the target. Looking to 2022 we are really not sure that will happen. Moreover, with central banks around the world moving in a much narrower direction, it is not certain that the Bank of Israel will be able to continue to sit on the lines for a long time. In our estimation, an increase in interest rates in Israel is possible as early as the second half of 2022.
Bottom line, We Enter 2022 in a state of significant economic slowdown in the world and central banks that must raise interest rates – Will be interesting.
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