MAMOKETE LIJANE: Whereto from runaway inflation and the great monetary policy penance?

Time, once lost, can never be regained. Which is why I never try to wish time away. However, some days, weeks, months and years can be so trying that one cannot but be grateful when they pass.

For obvious reasons, 2020 was such a year. The year 2021 offered some hope, with the world gorging on global liquidity and commodity prices holding their own. But halfway through the year KwaZulu-Natal was set alight, and 2021 became another year people wished they had slept through.

The year 2022 will be remembered as one of runaway inflation and the great monetary policy penance. Central banks were the primary backer of the global economy and financial markets after the 2008 financial crisis. For more than a decade, markets had been sustained by the “Fed(eral Reserve) put”.

Any little pout in markets was met with a dovish pivot by developed economy central banks trying to keep moribund inflation in their economies positive. This dynamic culminated in the easiest of easy monetary policy settings in the year after the onset of the Covid-19 crisis in 2020.

This year, multiple markets are in distress, with nary a blink from US Federal Reserve chair Jerome Powell. With few exceptions, central banks have unwound the accommodation injected into economies in 2020, and many now have rates above what they were before the crisis. Inflation, considered all but dead in the decade to 2020, has returned stronger than before. The high inflation, high rates dynamic of 2022 sets the stage for 2023.

The inflation shock of 2022 had already weakened global growth, and widespread monetary policy tightening across developed and developing economies will depress it further. The one ray of light in this gloomy outlook is the apparent relaxation of zero-Covid restrictions in China. By further easing supply constraints a Chinese reopening should ease inflation. Chinese demand will also be good for the global economy, but it is unlikely that exiting zero Covid-19 will be straightforward and simple, and the upside might be limited. 

Global recessionary conditions are associated with tightening financial conditions as investment moves towards lower-risk assets. Global recession risks are not yet fully discounted in financial assets and commodity prices. We have seen a reprisal of assets to reflect higher rates. Thus, we will probably have another sell-off in risky assets sometime in 2023. This sell-off, once it occurs, will only be alleviated by a dovish tilt in monetary policy. Financial markets are already discounting such a scenario, with the Fed expected to start cutting rates in 2023.

Policymakers in higher-risk jurisdictions such as SA will be wary of such a scenario. The risk of capital outflows, rand weakness and another domestic inflation shock remains high. The Reserve Bank will therefore remain vigilant and monetary policy will be tight. However, risk-off and even capital outflows are unlikely because recessionary conditions do not require the same response of the past year. The prospect of monetary policy easing in response implies far lower hiking pressure compared with that in the past year. Global recessions are also typically accompanied by lower commodity prices, which would blunt the inflationary effect of a weaker currency.

The dramatic policy easing in response to the 2020 Covid-19 crisis, the Ukraine war and China’s zero Covid-19 policy created the inflation spiral and dramatic withdrawal of policy stimulus in 2022, which in turn should be a drag on the global economy in 2023.

Countries successfully traverse the territory of treacherous global economic conditions. SA managed brilliantly in the period after the 2008 financial crisis, made the situation worse with Nenegate when commodity prices collapsed in 2015, and walked itself deftly back from the brink in 2020.

The year 2023 promises to be another treacherous one, and there will be little room for error. We should avoid scoring own goals. 

• Lijane is a macro strategist.