Global high inflation caused by congestion of ships in ports and soaring energy prices continues to plague major economies. However, the sharp fall in British inflation indicators has provided central banks in other regions with solution-raising interest rates as soon as possible.
A measure of the market’s expectations of inflation in the UK—the UK 10-year break-even inflation rate (the difference between the yield on the 10-year British government bond and the yield on the 10-year inflation-protected government bond) has fallen from a recent 25-year high and has been recorded since The biggest drop since October 2019.
The December retracement reduced the index’s annual growth rate to 94 basis points, still the highest since 2009. On December 16, 2021, the Bank of England Monetary Policy Committee (MPC) agreed to raise interest rates by 15 basis points with a vote ratio of 8-1.
Rohan Khanna, the interest rate strategist at UBS, said, “Central banks are looking for countermeasures, and we expect UK inflation to continue to fall next year.” He expects the UK 10-year breakeven interest rate to return to the range of 3% to 3.5% in 2022.
At present, the United States and Europe are facing the problem of high inflation, but the Fed has set a threshold for itself to raise interest rates.
Chairman Powell has announced that it will speed up the pace of “reducing the scale of bond purchases” (Taper) and has hinted that interest rates will be raised at least three times in 2022. But Powell has repeatedly reiterated that he will not consider raising interest rates until the end of Taper, which means that there is a high probability that US interest rates will not change before March this year.
The Fed continued to inject liquidity into the market during these three months. For Fed officials, raising interest rates does not seem too urgent, but for US President Biden, this may be an option that can solve the urgent need.
Currently, Biden’s $180 million spending bill is stuck in the Senate, and soaring energy and food prices have made his approval ratings worse. If the Democrats lose only one Senate seat in the midterm elections within this year, the initiative of the spending bill will fall into the hands of the Republicans.
Biden once claimed that his government has made progress in dredging the supply chain, but inflation data proves that his efforts will not show up so quickly. To “stop the bleeding” of the support rate, it may be worth a try to raise interest rates earlier. The Bank of England has also proved that this method has an immediate effect.
Although the Fed claims the independence of monetary policy, Biden currently has the power to nominate three new directors to fill the vacancies of the Federal Open Market Committee (FOMC), which gives him a certain right to speak in monetary policy.
But this also has certain risks. Once the central bank raises interest rates rashly, the process of economic recovery may be forcibly interrupted, and new and unfavorable factors may appear in the financial market.