The absence of a governor didn’t stop South Korea from hiking rates on Thursday, when the BOK joined New Zealand and Canada in the club of central banks leaning harder into the inflation fight this week.
“The existing inflationary pressures could go on longer than expected due to the Ukraine situation,” acting chairman Joo Sang-yong, who’s standing in for the unconfirmed Rhee Chang-yong, said.
It was Korea’s fourth hike of the current cycle (figure below). The decision was unanimous. The policy rate is now the highest since 2019.
Singapore dialed up its own tightening efforts on Thursday, employing two tools at once for the first time in a dozen years.
Incessant documentation of central banks’ efforts to rein in price pressures likely seems a bit tedious at this juncture, just as highlighting each and every easing measure taken to combat the pandemic in its early stages probably came across as unduly pedantic to some readers. Obviously, I’m apprised that Bank of Korea meetings and MAS tweaks don’t make for the most compelling reading.
But this is a pivotal moment in the history of modern monetary policy. An epochal shift in the macro environment is putting the idea of inflation targeting to the test. Success or failure will determine the future of central banking and, quite possibly, be the deciding factor for many governments when it comes time to assess the desirability of preserving central bank independence. “You had one job!”, as the quip goes.
The fact is, this is infinitely more important than any twists and turns in the Elon Musk-Twitter saga, although Musk’s efforts to commandeer the platform speak to my longstanding “Gods” thesis, something I’ll return to over the long weekend in the US. Note that the financial media is just like any other media — a profit-maximization machine. Once they’ve squeezed what they can squeeze out of a given story (in this case monetary policy tightening to combat inflation), the “old” story gets pushed further and further below the fold, irrespective of how important it may (still) be. Musk’s offer for Twitter on Thursday likely supplanted even Ukraine coverage for Bloomberg and CNBC, for example.
By contrast, I try to stick assiduously to the script. I want readers to know precisely what they can expect to read here. The news cycle flavor du jour is irrelevant to me. If it was important yesterday, it’s probably still important today. What Elon Musk is trying to buy doesn’t diminish the gravity of the unfolding macro shift, for example.
Tedious though it is, I’d recommend that anyone who avoided reading about 50bps moves from New Zealand and Canada on Wednesday take a few minutes to dive in. The upsized hikes, documented here, should have a signaling effect.
We’re witnessing peak inflation panic and some of the ensuing price action suggests markets are inclined to view central banks’ belated efforts to catch up to price pressures as a reason to skate ahead of the proverbial puck. The kiwi fell hard after the RBNZ hike on Wednesday and Korean bond yields initially dropped a half-dozen basis points on Thursday following the BOK move.
Last week, I endeavored (again) to suggest the Fed is fully-priced. That’s been a fool’s errand since December, but fifth time’s the charm. US two-year yields are on pace for a large weekly decline (figure below).
Admittedly, some of that looks like a squeeze and/or a mass unwind in crowded flatteners. It’s probably too early for the post-inversion re-steepening.
“The 30bps rally [in 2s] in the course of just three days speaks to the fluidity of the market’s current interpretation of the Fed’s reaction function,” BMO’s Ian Lyngen and Ben Jeffery remarked. “Recall it was not so long ago that investors were debating the likelihood that the Fed would deliver an emergency rate hike, or if the discount rate meeting would be utilized as a venue to adjust the target,” they added. “Just as that represented hawkish assumptions pressing too far, we’re of the mind pricing out the chance of a 50bps move in May represents a too-dovish response to a single CPI print.”
Certainly, Wednesday’s PPI scorcher suggested that consumer prices in the US, “peaking” or not, aren’t poised to converge to target anytime soon. Still, markets do tend to bring forward future outcomes. And given the panicked nature of the global policy tightening push, which continued on Thursday, it’s not too much of a stretch to suggest that at least some traders are already pricing the policy-induced downturn many pundits claim is inevitable.