a double-edged sword for central banks
Paris (AFP)- Central banks around the world are using aggressive interest rate hikes to trap runaway inflation, at the risk of bringing the global economy down with it.
The US Federal Reserve and its counterparts in Europe and most emerging economies have hiked rates this year as consumer prices hit record highs in decades.
While higher rates aim to rein in runaway inflation by slowing economic activity, they can trigger a recession if borrowing costs get too high for businesses and individuals.
“It reminds me of what was happening in the Middle Ages: bloodshed,” Nobel laureate in economics Joseph Stiglitz told AFP, referring to the belief at the time that patients could be cured. diseases by causing them to bleed.
“When they leaked the blood, the patient didn’t recover, usually, unless a miracle happened. And so they leaked more blood and the patient got sicker and sicker” , said Stiglitz.
“I fear central banks will do the same now,” he warned.
The Federal Reserve will announce its latest monetary policy decision on Wednesday, as investors fear that after two consecutive rate hikes of 0.75 percentage points, the bank may go for a full point this time.
The Bank of England and its counterparts in South Africa, Sweden and Switzerland are also expected to continue to tighten monetary policies in their own meetings this week.
Consumer prices have started to rise due to bottlenecks in supply chains as businesses struggle to keep up with a recovery in demand after economies began to emerge from Covid lockdowns.
After repeatedly describing inflation as ‘transitional’ last year, the Federal Reserve and European Central Bank have changed their minds this year as Russia’s invasion of Ukraine caused prices to soar energy and food.
Central banks have since increased the hikes in near-synchronous fashion, raising fears that their belated and aggressive reactions are now doing more harm than good.
“Did the economy really need this to slow down? said Eric Dor, director of economic studies at the IESEG management school in France.
“Inflation itself caused a slowdown in activity,” Dor said. “Households are losing their purchasing power, wage increases are below the rate of inflation and (inflation) is holding back consumption.”
ECB President Christine Lagarde acknowledged the possible blow to the economy last week.
“Is it going to cause a little loss of growth? It’s possible,” she said Friday at a conference in Paris. “It’s a risk we have to take after weighing it well.”
Earlier this month, US Treasury Secretary Janet Yellen said there is “certainly a risk” of an economic downturn.
But she noted that the U.S. job market is “exceptionally strong” with almost two vacancies for every worker looking for a job.
The United States is still haunted by the specter of inflation that lasted nearly a decade in the 1970s and 1980s.
A World Bank report released last week said a global slowdown accompanied by tighter monetary policies could trigger a global recession next year, with sharp declines in emerging and developing countries in particular.
While economists debate whether the cure for inflation could be worse than the disease, some disagree on the reasons for the surge in prices.
Stiglitz said the request is not the cause.
“Central banks around the world are pretending or acting as if it’s demand that’s creating inflation,” he said, noting that higher rates won’t produce more energy or food or help mitigate the global supply chain crisis.
“To use a recipe for the wrong diagnosis is to get the wrong prescription,” he said, adding that higher rates will increase the cost of investments needed to relieve bottlenecks and raise rents to states. -United.
© 2022 AFP