Central banks are in line with the contraction in inflation

Central banks are in line with the contraction in inflation – Mail Bonus

Central banks have intensified their fight against fleeing inflation, a necessary remedy that could have a detrimental side effect of turning countries into a recession, experts say.

Last week, the US Federal Reserve announced its largest interest rate hike in almost 30 years, followed by the Bank of England’s fifth straight hike and the first in 15 years in Switzerland.

“This week was the first. The craziest in my experience,” said Frederick Ducrozet, chief economist at Pictet Wealth Management.

The measures were successful in stock markets, where investors fear that even if interest rate hikes are needed, they could hamper economic growth if monetary policy is tightened too much.

“Recessions are increasingly likely as central banks compete to raise interest rates sharply before inflation gets out of hand,” said Craig Erlam, an analyst at OANDA.

Capital Economics, a research group, said it did not anticipate a recession in the United States.

“But the central bank is deliberately curbing demand to ease inflationary pressures. This is a difficult line to follow and there is a clear risk that it will go too far and the economy will go into recession,” he said in a comment.

Emerging market countries could fall victim to collateral due to interest rate hikes. The dollar rises as the US Federal Reserve raises its policy rate.

“A strong dollar will complicate (debt repayment) countries with deficits, which often borrow in that currency,” Ducrozet said.

– Swiss surprise – Central banks had claimed last year that inflation was only “temporary” as prices were driven up by bottlenecks in supply chains after governments broke the deadlock.

But energy and food prices have risen sharply in the wake of Russia’s invasion of Ukraine, boosting inflation and lowering economists’ global growth prospects this year.

This has left the central bank with no choice but to move harder than expected.

The Central Bank of Australia raised its policy rate more than expected earlier this month, while Brazil last week raised its benchmark rate for the 11th time in a row. More migrations are imminent in the United States and Europe.

But it is the Swiss central bank that caused the biggest shock on Thursday when it announced a 0.5 percentage point increase, the first since 2007.

The SNB had focused on keeping the Swiss franc from being too strong until now.

“The SNB’s actions are noteworthy in that they mark a significant change in direction (distance) from a very faded position,” said Michael Hewson, chief market analyst at CMC Markets UK.

The European Central Bank has been slower than its peers. It is putting an end to its massive bond buying system and will finally raise interest rates next month for the first time in a decade.

The eurozone is facing another problem: The yields paid by its governments to borrow have risen, as indebted countries such as Italy have been charged premiums over Germany, safer investors’ bets.

This “spread” revived memories of the eurozone debt crisis, which prompted the ECB to hold an emergency meeting on Thursday, after which it said it would design instruments to prevent further bond market stress.

The Bank of Japan deviated from international developments on Friday as it stood by its decision not to raise interest rates, sending the yen close to its lowest level against the dollar since 1998.

But even the Bank of Japan could change its policy, said Stephen Innes, chief executive of SPI Asset Management.

“BoJ members are considering public dissatisfaction with inflation and the rapid depreciation of the yen,” said Innes.

“While they intend to maintain the current easing policy, they could look at making some changes to support the currency,” he said.

– No immediate correction – Consumers must be patient before they see interest rate hikes affect prices.

Christine Lagarde, the ECB’s chief executive, put it bluntly when she announced plans to raise interest rates next month: “Do you expect interest rate hikes in July to have an immediate effect on inflation? The answer is no.”

Central banks do not have control over some of the problems that raise inflation, such as rising energy and food prices, and the supply chain is howling.

Capital Economics said that energy and food prices were 4.1 percentage points out of a 7.9 percent increase in consumer prices in the major developed economies over the past year.

It expects oil, gas and agricultural commodity prices to start falling later this year, which would significantly reduce inflation, while core inflation will remain high.

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