Monetary Tightening May Come Sooner Than Expected... Attention Focused on China's Exit Strategy and More

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Kim Eunbyeol] As countries gradually recover from the economic shock caused by COVID-19, experts are paying attention to the possibility of liquidity supply reduction happening sooner than expected. This is because if the economic recovery accelerates and inflation rebounds, central banks around the world may implement monetary tightening faster than anticipated.

According to Dow Jones and others on the 14th, investment bank (IB) Goldman Sachs recently raised its forecast for the US second-quarter growth rate from 10% to 11%, and projected the year-end unemployment rate at 4.1%. The growth rate for 2021 was revised upward by 0.2 percentage points to 6.8%, and for 2022 to 4.5%.

As the economy normalizes, inflation is also expected to rise faster than previously anticipated. Goldman Sachs had initially forecasted inflation to reach 2.05% by the end of 2024, but has now revised it upward to 2.15%.

Goldman Sachs stated, "The timing of the US Federal Reserve (Fed) raising interest rates will be moved forward from the second half of 2024 to the first half," adding, "This implies faster monetary tightening." They expect the Fed to begin tapering asset purchases in early 2022.

The reason Goldman Sachs made this forecast is based on the expectation that the $1.9 trillion stimulus package being pushed by the Joe Biden administration will accelerate the US economic recovery and inflation rise.

As China's economic recovery speeds up, there is also a possibility that China will initiate monetary tightening sooner than expected.

Capital Economics (CE) forecasts that China's Consumer Price Index (CPI) will show a growth rate in the 2% range by the end of the second quarter, and analyzes that the People's Bank of China will tighten monetary policy within this year. Last month, China's Producer Price Index (PPI) also showed a year-on-year increase for the first time since January last year. In January, CPI fell 0.3% year-on-year, while PPI rose 0.3%.

CE stated, "Due to the Lunar New Year holiday in February, CPI may surge, and energy prices will rebound due to the base effect from last year's sharp drop in oil prices," adding, "Because of this, the People's Bank of China is expected to implement policy tightening this year."

China implemented aggressive economic stimulus measures to respond to the economic shock caused by the spread of COVID-19. However, as debt issues have recently reemerged as a potential risk in the Chinese economy, the country is seeking an exit strategy for monetary policy. But with concerns that sudden tightening could destabilize the market, the People's Bank of China is attempting to calm the market through verbal statements.

Governor Yi Gang of the People's Bank of China said in a speech at the Davos meeting on the 26th of last month (local time), "We will not withdraw supportive (stimulus) policies too quickly," emphasizing the importance of balancing the dual goals of supporting economic recovery and preventing financial risks.

This content was produced with the assistance of AI translation services.