Recession: Central banks are walking the tightrope between inflation and recession

Central banks have stepped up their fight against refugees inflationnecessary means of protection, which may have the adverse side effect of tilting the sides recessionanalysts say.

Just last week, US Federal Reserve announced its largest interest rate increase in almost 30 years, followed by the fifth consecutive increase in Bank of England and the first in 15 years in Switzerland.

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

These moves have shaken stock markets, as investors fear that although interest rates need to be raised, they could halt economic growth if monetary tightening becomes too aggressive.

“Recessions are becoming more likely as central banks vie to raise interest rates dramatically before inflation spirals out,” said Craig Earlam, an analyst at OANDA’s online trading platform.

The Capital Economics study group said it did not expect a recession in the United States.

“But the Fed is deliberately limiting demand to reduce price pressures. This is a difficult line to step on and there is clearly a risk that it will go too far and the economy will fall into recession,” the note said.

Emerging countries may be concomitant victims of rising interest rates. The dollar rises when US Federal Reserve raises its rates.

“The strong dollar will complicate (debt repayment) countries with deficits, which often borrow in this currency,” Ducrose said.

– Swiss surprise – Central banks insisted last year that inflation was only “transitional” as prices rose from bottlenecks in supply chains after governments came out of the blockade.

But energy and food prices have risen since Russia’s invasion of Ukraine, which has boosted inflation and forced economists to cut global growth prospects this year.

This left central banks with no choice but to act more aggressively than planned.

Australia’s central bank raised interest rates more than expected earlier this month, while Brazil raised its reference interest rate for the 11th time last week. More campaigns are underway in the United States and Europe.

But it was the Swiss National Bank that caused the biggest shock on Thursday when it announced a 0.5 percentage point increase in interest rates, the first since 2007.

The SNB is focusing on keeping the Swiss franc too strong so far.

“SNB’s actions are remarkable in that they mark a significant policy change (moving away) from a very leprous position,” said Michael Huson, chief market analyst at CMC Markets UK.

IN European Central Bank acts slower than its counterparts. It is putting an end to its large-scale bond-buying scheme 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 money have risen, with indebted countries such as Italy being charged a premium compared to Germany, a safer bet for investors.

The “spread” revived memories of the eurozone debt crisis, prompting the ECB to hold an extraordinary meeting on Thursday, after which it said it would develop a tool to prevent further stress in the bond market.

The Central Bank of Japan opposed the global trend on Friday, sticking to 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 can adjust its policy, said Stephen Ines, managing partner at SPI Asset Management.

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

“While they plan to maintain the current easing policy, they may seek to make some changes to support the currency,” he said.

– There is no immediate solution – Consumers will have to be patient before they see that raising interest rates has an effect on prices.

ECB Governor Christine Lagarde said bluntly when she announced plans to raise interest rates next month: “Do we expect an increase in interest rates in July to have an immediate effect on inflation? The answer is no. ”

Central banks have no control over some of the problems that raise inflation, such as rising energy and food prices and the roar in the supply chain.

Capital Economics reported that energy and food prices accounted for 4.1 percentage points of the 7.9 percent increase in consumer prices in major developed economies over the past year.

Oil, gas and agricultural commodity prices are expected to fall later this year, which will sharply reduce inflation, but core inflation rates will remain high.

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