RAPID INFLATION RATCH : MASTER GLOBAL ESSAY

 

Low-interest bubble is bursting worldwide. Borrowing costs climb in lock step in an attempt to tame global inflation.

NEARLY four dozen countries have raised interest rates in the last six months, as central banks in the United States, England, India and other nations push borrowing costs higher in a bid to contain the most rapid inflation in decades 

The U.S. Federal Reserve last week drove up its benchmark policy rate - its third increase this year and its biggest since 1994. Within hours, Brazil, Saudi Arabia and others announced rate changes. Switzerland and Britain followed suit the next morning.

So far in 2022, at least 45 countries have lifted rates, data from FatSet shows, with more moves to come.

High rates are powerful tools for fighting rising prices : They make borrowing more expensive, dampening consumer demand and business expansion, in turn cooling economic growth and slowing hiring.

That can translate into weaker wage growth for households and less pricing power for companies, eventually pulling down inflation.

It is a delicate balancing act, one that puts pressure on policymakers to rein in the economy without killing it. Economists and investors see that as a daunting challenge. As the World Bank institutions issue grim forecasts, worries of a recession have grown.

''Persistent inflation pressures and deteriorating expectations are forcing central banks to become more aggressive,'' economists at Barclays wrote on June 10. ''As financial conditions worsen and sentiments drops, the real economy could follow.''

The Fed is poised to continue raising rates this year, most likely at a rapid pace. The European Central Bank has signaled that it will raise rates in July for the first time in 11 years, and investors increasingly believe it will move quickly as it tries to slow the economy. 

The Bank of Canada may also announce a large increase next month, after having already raised rates this month. Similar shifts have been announced by many of the world's largest economies.

One outlier is Russia. Its central bank raised interest rates above 20 percent soon after the country invaded Ukraine. In the months since, Russia has made four cuts to bring levels down to what they were before fighting began - even as the course of the economy there remains uncertain.

The world's upward march is a big departure from the policy approach following the financial crisis of 2008, when central bankers often made increases in fits and starts - if at all.

Before the coronavirus, economists thought the world might be stuck in a low-rate, low-inflation, slow-growth trap - and many of the world's economies began to push rates down.

But after the outset of the pandemic, government stimulus spending packages meant to cushion against the economic fallout ended up stoking demand. Supply chains were roiled by factory shutdowns, shipping woes and labor shortages. Combined, those forces revived long-dominant price pressures.

So far, inflation shows little sign of easing. American consumer prices picked up again in a report this month as gasoline prices surged and a variety of goods and services grew sharply more expensive.

The war in Ukraine could continue to push up commodity prices, while efforts to contain the coronavirus in China and worker strikes in South Korea threaten to further disrupt manufacturing.

Demand in America has largely remained robust, though it has shown early signs of easing, and consumers in some other parts of the world are beginning to pull back.

The question now is whether the global economy will be able to withstand a cycle of rate increases unlike any it has recently - and possibly ever - experienced. The outlook is not promising.

''The war in Ukraine, lockdowns in China, supply-chain disruptions and the risk of stagflation are hammering growth,'' David Malpass, the president of the World Bank, said in a report this month.

''For many countries, recession will be hard to avoid.''

The World Students Society thanks authors Karl Russell and Jeanna Smialek.