Almost four dozen countries have hiked interest rates in the previous six months, as Central Banks in the United States, England, India, and other countries seek to curb the fastest inflation in decades.
The Federal Reserve raised its benchmark policy rate on Wednesday, the third hike this year and the largest since 1994.
Brazil and Saudi Arabia were among the countries that declared adjustments to their monetary policies within hours of the Fed’s announcement.
So far in 2022, 44 countries have lifted rates, data from FactSet shows, with more moves to come.
Higher interest rates are effective instruments for combating increasing prices because they make borrowing money more expensive, weighing on consumer demand and corporate expansions, cooling economic growth and lowering hiring. This can lead to slower wage growth for families and less pricing power for businesses, eventually lowering inflation.
It’s a difficult balancing act that puts pressure on policymakers to rein in the economy without crashing growth. Economists and investors perceive this as an increasingly difficult task. Worries about a potential recession have intensified as the World Bank and other agencies offer bleak projections.
“Inflationary pressures and weakening expectations are pressuring central banks to become more proactive,” Barclays economists said last week. “As financial circumstances deteriorate and sentiment falls, the actual economy may follow.” So far, inflation shows no signs of abating. In a study released last week, American consumer prices rose once more as gas prices rose and a range of products and services were much more costly. The Ukraine conflict may continue to drive up commodity costs, while attempts in China to limit the coronavirus and worker strikes in South Korea threaten to further disrupt component manufacture.
The Ukraine conflict may continue to drive up commodity costs, while attempts in China to limit the coronavirus and worker strikes in South Korea threaten to further disrupt component manufacture. Demand in the United States has remained mainly healthy, but it has begun to wane, and consumers in other areas of the world are beginning to draw back.
The issue now is whether the global economy can endure a rate-hike cycle unlike any it has lately — or maybe ever — seen. The prognosis is not encouraging.
“The crisis in Ukraine, Chinese lockdowns, supply-chain disruptions, and the prospect of stagflation are pounding GDP,” World Bank President David Malpass warned last month in a report. “Recession will be difficult to avert for many countries.”