More than 19 months have passed since the major economic blocs began the current restrictive monetary policy cycle. It should be emphasised how rapid and large-scale this cycle has been, something that in itself is a milestone in the global economy.
However, it can be seen across the board that the expected effects in terms of a reduction in global economic activity are not being felt. They may even be felt momentarily, but in general terms, the main objective in terms of economic metrics has not yet been achieved – the reduction in inflation. This raises the question: is a fall in global interest rates possible in the short term?
In June and July 2022, the US Federal Reserve (FED) and the European Central Bank (ECB) began this cycle, respectively, against a backdrop in which inflation in both the US and the European bloc had reached levels well above the target (2%) set by these institutions in both regions.
During this period, there was a significant increase in citizens’ incomes in both regions, due to political pressures and in order to maintain citizens’ purchasing power. This, combined with other reasons that I will mention later, generated unprecedented inflationary pressure.
Among the other reasons that have contributed to inflationary pressure is the high demand that has arisen in the post-pandemic opening up of several global economies, as there was not enough supply to meet these needs.
Mozambique was the first economy to enter a restrictive period, with its first rate hike in January 2021, and one of the reasons was that it was extremely vulnerable to external shocks
In addition, we saw the outbreak of war between Russia and Ukraine, which had a significant impact on the different energy and food value chains, and created a lot of uncertainty globally. This uncertainty ended up being reflected in prices, which were already on an inflationary trend. This war also plunged the European bloc into an unprecedented energy crisis, with a major shift between energy suppliers to the main European countries, particularly Germany, which imported practically all its energy from Russia.
Currently, the conflict between Palestine and Israel is another potential shock that could have an impact on the global economy, as a potential escalation of the conflict to neighbouring countries could create disruptions in the balance of the oil market.
Since the beginning of this restrictive cycle, one of the great debates has been the likelihood of a slowdown with a “soft landing” vs. a “hard landing,” where in one case the expected effects of the recession are more abrupt compared to the other.
Over time, it has been noted that the global economy has been experiencing a “soft landing”, since there has only been a reduction in economic activity to accompany the slowdown in the inflation rate. Indicators such as the unemployment rate, the acceleration of defaults or the evolution of risk asset prices have not yet been impacted by the slowdown, but may be vulnerable in the short term.
All these factors mentioned above, and with greater emphasis on the fact that the global economy is still growing, are factors that generate some doubt about a possible fall in rates at a global level, at least in the short term.
In addition, the leaders of the central banks of the major economic blocs continue to hint at possible increases or maintenance of current rates for undetermined periods, aligning investors’ expectations with the economic information that will be published in the near future.
Mozambique was the first economy to enter a restrictive period, with its first rate rise in January 2021, and, as mentioned by the Governor of the Bank of Mozambique, one of the reasons why the country was the pioneer in implementing this measure is due to the fact that it is extremely vulnerable to external shocks, since it is a small economy and mostly imports all the products it consumes.
In addition, the Mozambican economy has not yet managed to create sufficient monetary reserves to help cushion the impact of these shocks. Currently, the Bank of Mozambique has been dealing with the problem of excessive liquidity in the banking system, with the impacts of the implementation of the Single Wage Scale (TSU) and significant increases in public spending, creating a scenario where any changes to the current monetary policy must be made prudently, guaranteeing the fulfilment of its primary mandate, which is to control inflation and guarantee exchange rate stability, something in which it has been successful in recent times.