Welcome: FOSHAN BANDON NEW ENERGY TECHNOLOGY CO., LTD.
Home      News       The World Holds High the Sword of Moneta…

News

The World Holds High the Sword of Monetary Policy

The second half of 2006 is a time when central banks around the world are wielding interest rate sticks. From the end of June to mid-August, the central banks of the United States, Japan, the Eurozone, the United Kingdom, Australia and South Korea successively raised their benchmark interest rates. China is no exception. This year alone, the People's Bank of China raised the statutory deposit reserve ratio twice, the RMB loan benchmark interest rate twice, and the RMB deposit benchmark interest rate once. For China's central bank, which has always pursued a prudent monetary policy, such frequent monetary policy actions are rare.

The original intention of this round of global interest rate hikes is to curb the inflation risks that may be caused by economic overheating, and the main force behind this inflationary trend is international crude oil prices. This rising cycle of international crude oil prices began in 1998. At the beginning of 1998, the price of a basket of crude oil from the Organization of the Petroleum Exporting Countries (OPEC) was at a historic low of US$12.28 per barrel. In 1999, the price of crude oil exceeded US$20 per barrel. , exceeded US$30 in 2003, US$40 in 2004, US$60 in 2005, and now stands above US$70 per barrel, approaching the peak during the "oil crisis" in the 1970s.

Cost-push inflation caused by high oil prices has become a lingering haze on the minds of central banks, forcing them to raise the sword of monetary policy in an attempt to prevent it.

Unfortunately, high oil prices have rigid structural problems. The reasons for high oil prices include insufficient supply of crude oil, depreciation pressure on the U.S. dollar, and unstable political situations in oil-producing countries. The interest rate method can only indirectly reduce the consumer demand of oil importing countries by reducing GDP growth. However, under the combined effect of multiple factors, it is difficult to achieve the expected effect of raising interest rates.

First of all, crude oil prices are not only affected by demand, but also by supply. It is an equilibrium result of the two-way behavior of supply and demand.

Generally speaking, the behavior of oil exporting countries follows the following rules: when oil prices fall, in order to ensure stable export revenue, oil exporting countries tend to increase production and exports; when oil prices rise, due to rigid demand, they tend to expand output It will suppress prices, and oil exporting countries will generally control production at this time in order to achieve higher profits.

In other words, although raising interest rates can suppress oil demand to a certain extent, if the supply is controlled at the same time, the result of the two effects is that the supply and demand situation of oil does not change and the price is rigid and firm.

Secondly, the only pricing currency for global oil transactions is the U.S. dollar. Therefore, in addition to the relationship between supply and demand, the factors that affect oil prices include the strength of the U.S. dollar. According to expert estimates, the correlation coefficient between crude oil prices and the value of the U.S. dollar is -0.7. This means that the weaker the value of the U.S. dollar, the higher the oil price. Now that this condition is met, the mid- to long-term depreciation trend of the U.S. dollar is basically established. Because of global economic imbalances and the huge twin deficits (fiscal deficit and current account deficit) of the United States, they are getting worse.

At present, the Iranian nuclear crisis and the Israel-Lebanon conflict have made the international political and security situation in the oil-producing countries in the Middle East even more confusing. Many people believe that this instability in oil-producing countries will push up oil prices, but this view may be a misunderstanding to some extent. In fact, before a conflict breaks out, market prices have often priced in the risks and fluctuations that may arise from the conflict. The international community is well prepared to deal with sudden oil shortages. Therefore, speculative forces tend to push up oil prices before a conflict breaks out; but after a conflict actually breaks out, oil prices may fall sharply.

In fact, raising interest rates is just a means of total control under normal conditions, while high oil prices are essentially a structural problem. Therefore, it is difficult for global interest rate hikes to shake the high oil prices, and the reality of market evolution gives us the best answer.