Global Central Banks Ramp Up Inflation Fight

Central banks around the world continue to inflate rapidly, permeating a wide range of products and services, making the world economy more expensive credit, lower stock and bond values, and potentially a sharp recession in economic activity.

It’s a different moment than what the international community has experienced for decades, as countries around the world are trying to curb sharp price increases before they become a more lasting part of the economy.

Inflation has skyrocketed in many developed and developing countries since early 2021 as a result of the clash between the shortages created by the pandemic and strong demand for commodities. Central banks have spent months hoping that the economy will resume, transportation routes will be unclogging, supply constraints will be eased, and consumer spending will return to normal. It hasn’t happened, and the war in Ukraine has only intensified the situation by disrupting oil and food supplies and pushing up prices further.

Global economic policymakers have begun full-scale response this year, with at least 75 central banks raising interest rates, many of which have risen from historically low levels. Policy makers can’t do much to keep high energy prices down, but higher borrowing costs give supply the opportunity to catch up with a range of goods and services so that inflation does not continue indefinitely. Helps to slow down consumer and corporate demand.

The European Central Bank will meet this week and is expected to raise rates for the first time since 2011. Authorities have suggested perhaps only a quarter of a point, but September will continue to move even further.

Other central banks have already begun to move more aggressively, with Canadian to Philippine officials rising interest rates in recent weeks amid concerns that consumers and investors are steadily expecting higher prices. Is increasing the pace. Characteristics of economic background. Federal Reserve officials have also expedited their response. They have raised borrowing costs the most in June since 1994, suggesting that even bigger moves are possible, but some recent times, speeding up again is the preferred plan for the upcoming July meeting. It suggests that it is the next three-quarters of the plan. The increase in points is most likely.

The global economy could slow sharply among investors as interest rates soar around the world and become expensive to borrow money that has been cheap for years, and some countries are in pain. It raises concerns about the possibility of a recession that accompanies. Commodity prices, while some serve as a barometer of expected consumer demand and the health of the global economy, are declining as investor anxiety grows. International economic officials have warned that the future path could be bumpy as central banks adjust their policies and the war in Ukraine increases uncertainty.

Cristalina Georgieva, Managing Director of the International Monetary Fund, said: Blog post on wednesday. “Acting now is less harmful than acting later,” Georgieva argued that central banks need to respond to inflation.

Georgieva pointed out that since July 2021, about three-quarters of the financial institutions tracked by the fund have raised interest rates. Developed countries rose by an average of 1.7 percentage points, while emerging countries rose by more than 3 percentage points.

In recent years, emerging markets have often raised interest rates in anticipation of the Fed’s slow and steady movements in order to avoid large fluctuations in currency values ​​that are partially dependent on cross-border interest rate differentials. But this series of rate hikes is different.Inflation is running at the fastest pace in decades in many places, with central banks in various developed countries, including the European Central Bank. Swiss National BankThe Bank of Canada and the Reserve Bank of Australia are or may be participating in the Fed and are rapidly raising interest rates.

Bruce Kasman, Chief Economist and Head of Global Economic Research at JPMorgan Chase, said:

It was in the 1980s that so many major countries suddenly raised interest rates to combat such rapid inflation, and the contours of the world’s central banks were different. The euro currency block of the 19 countries for which the ECB sets policies did not yet exist. And the world’s financial markets were not very well developed.

With so many central banks facing rapid inflation and trying to curb inflation by slowing their economies, the era of very low interest rates is over and countries and businesses adapt to changing capital flows. Therefore, the possibility of market turmoil increases. These changing trends can affect whether a country or company can sell debt or other securities to raise funds.

US Treasury Secretary Janet Yellen said in a speech last week: “Financial conditions will be severe due to widespread inflationary pressures, geopolitical uncertainties from Russia’s war with Ukraine, and slowing global growth. I have. ” “Currently, portfolio investment is starting to flow out of emerging markets.”

For financial markets, adjusting to high interest rates is “unstable and there is no way around it,” said George Goncalves, head of US macro strategy at MUFG Securities Americas. And as interest rates rise, stocks and other asset prices can fall permanently, as savers receive higher rewards for low-risk investments such as government debt.

“The incentive is to pursue yields, which will push the market to a higher rating than if it were based on fundamentals,” Goncalves said.

Concurrency also increases the risk of a recession in some countries as consumers and businesses withdraw their spending.

Kasman estimates that there is a 40 percent chance of a recession in the United States and Western Europe during the next year. The risk stems from both the central bank’s move and the cataclysm of the Russian war in Ukraine, which is showing no signs of ending. But if the recession can be avoided while keeping unemployment low and consumer spending and inflation rising, the FRB and other central banks will later interest rates to curb growth and curb inflation. He said he may have to raise the price.

The Federal Reserve says they still want to design what they often call a “soft landing.” recession.

However, inflation has proven to be unpleasantly stubborn. The latest consumer price index in the United States is 9.1% higher than analysts expect.Inflation rate in Canada Fastest pace since 1983. It is also the highest in 40 years in the UK.

It emphasizes that global factors, such as limited supply of consumer goods such as automobiles and clothing and rising oil and food costs, are causing many of the price surges. It also explains why so many central banks are responding similarly and more quickly, even if they increase the risk of a recession.

The Bank of England was the first major central bank to start raising rates in December and has been steadily raising rates ever since. Policy makers are increasingly concerned that inflation will cause the UK’s cost of living crisis, and that higher interest rates could exacerbate economic distress. At the same time, they show that they can act more powerfully, gaining clues from their global peers. Hupil, Chief Economist at the Bank of England, is “willing to adopt tightening at a faster pace, depending on the situation.” Said this month..

Matthew Luzetti, Chief US Economist at Deutsche Bank, said:

The Fed raised a quarter point in March, 0.5 points in May, and a three-quarter percentage point in June. Authorities expect to maintain that pace in July, but have also said they could raise rates even further.

“Inflation must be our focus at every meeting and every day,” said Fed President Christopher Waller. During a speech last week. “The daily spending and pricing of people and businesses depends on expectations of future inflation, whether they believe the FRB is fully committed to its inflation target.”

The Bank of Canada has already made a full percentage point move, and last week’s investors have made the biggest move since 1998, with more warnings coming.

The central bank’s decision-making council said, “The road to high interest rates as the economy is clearly over-demanded, inflation is high and expanding, and more companies and consumers are expecting high inflation to last for a long time. Decided to move forward. ” Said in a statement..

The central bank of the Philippines also surprised investors with a three-quarter point rise this month, and many other central banks made a big move. More action is coming. Central banks around the world have made it clear that they expect to continue raising borrowing costs for the fall.

Wells Fargo economist Brendan McKenna said: “From here it can be even more aggressive.”

The key question is what that means for the world economy. World Bank in June Global growth This year it will slow down sharply, but it remains positive. Still, there is a “significant” risk in a situation where growth is stagnant and inflation remains high, World Bank Governor David Malpas wrote.

If inflation takes hold, or if there are signs of changing expectations, central banks may have to respond more aggressively than they do now and deliberately crush growth.

Regarding the Fed, Kasman asked the unresolved question, “How far have you reached the conclusion that we need to be kicked here?”