Central banks ramping up inflation fight
Central bankers around the world are lifting interest rates at an aggressive clip as rapid inflation persists and seeps into a broad array of goods and services, setting the global economy up for a lurch toward more expensive credit, lower stock and bond values and — potentially — a sharp pullback in economic activity.
It is a moment unlike anything the international community has experienced in decades, as countries around the world try to bring rapid price increases under control before they become a more lasting part of the economy.
Inflation has surged across many advanced and developing economies since early 2021 as strong demand for goods collided with shortages brought on by the pandemic. Central banks spent months hoping that economies would reopen and shipping routes would unclog, easing supply constraints, and that consumer spending would return to normal. That has not happened, and the war in Ukraine has only intensified the situation by disrupting oil and food supplies, pushing prices even higher.
Global economic policymakers began responding in earnest this year, with at least 75 central banks lifting interest rates, many from historically low levels. While policymakers cannot do much to contain high energy prices, higher borrowing costs could help slow consumer and business demand to give supply a chance to catch up across an array of goods and services so that inflation does not continue indefinitely.
The European Central Bank will meet this week and is expected to make its first rate increase since 2011, one that officials have signaled will most likely be only a quarter point but will probably be followed by a larger move in September.
Other central banks have begun moving more aggressively already, with officials from Canada to the Philippines picking up the pace of rate increases in recent weeks amid fears that consumers and investors are beginning to expect steadily higher prices — a shift that could make inflation a more permanent feature of the economic backdrop.
Federal Reserve officials have also hastened their response. They lifted borrowing costs in June by the most since 1994 and suggested that an even bigger move is possible, although several in recent days have suggested that speeding up again is not their preferred plan for the upcoming July meeting and that a second three-quarter-point increase is most likely.
As interest rates jump around the world, making money that has been cheap for years more expensive to borrow, they are stoking fears among investors that the global economy could slow sharply — and that some countries could find themselves plunged into painful recessions.
Commodity prices, some of which can serve as a barometer of expected consumer demand and global economic health, have dropped as investors grow jittery.
International economic officials have warned that the path ahead could prove bumpy as central banks adjust policy and as the war in Ukraine heightens uncertainty.
“It is going to be a tough 2022 — and possibly an even tougher 2023, with increased risk of recession,” Kristalina Georgieva, managing director of the International Monetary Fund, said in a blog post Wednesday. Georgieva argued that central banks need to react to inflation, saying that “acting now will hurt less than acting later.”
Georgieva pointed out that about three-quarters of the institutions the fund tracks have raised interest rates since July 2021. Developed economies have lifted them by 1.7 percentage points on average, while emerging economies have moved by more than 3 percentage points.
In recent years, emerging markets have often raised interest rates in anticipation of the Fed’s slow and steady moves to avoid big swings in their currency values, which depend partly on interest rate differences across borders.
But this set of rate increases is different: Inflation is running at its fastest pace in decades in many places, and a range of developed-economy central banks, including the European Central Bank, the Swiss National Bank, the Bank of Canada and the Reserve Bank of Australia, are joining — or may join — the Fed in pushing rates quickly higher.
“It’s not something we’ve seen in the last few decades,” said Bruce Kasman, chief economist and head of global economic research at JPMorgan Chase.
The last time so many major nations abruptly raised rates in tandem to fight such rapid inflation was in the 1980s, when the contours of global central banking were different: The 19-country euro currency bloc that the ECB sets policy for did not exist yet, and global financial markets were less developed.
That so many central banks are now facing off against rapid inflation — and trying to control it by slowing their economies — increases the chance for market turmoil as an era of very low rates ends and as nations and companies try to adjust to changing capital flows.
Those changing flows can influence whether countries and businesses are able to sell debt and other securities to raise money.
“Financial conditions have tightened due to rising, broadbased inflationary pressures, geopolitical uncertainty brought on by Russia’s war against Ukraine, and a slowdown in global growth,” Janet Yellen, the U.S. treasury secretary, said in speech last week. “Now, portfolio investment is beginning to flow out of emerging markets.”
Kasman estimates that the United States and Western Europe have a 40 percent chance of a recession within the next year. That risk stems both from central bank moves and upheaval from Russia’s war in Ukraine, which shows no signs of ending. But if the recession can be averted now — leaving unemployment low, consumers still spending and inflation elevated — it could mean that the Fed and other central banks have to raise rates more later on to choke off growth and bring price increases down, he said.
Fed officials have said they still aspire to engineer what they often call a “soft landing,” in which hiring and spending cool down enough to allow wage growth and prices to moderate, but not so much that it plunges the economy into a deep and painful downturn.
But inflation has proved uncomfortably stubborn.
The latest consumer price index reading in the United States exceeded analyst expectations at 9.1 percent. In Canada, inflation is running at its fastest pace since 1983. In the United Kingdom, it is similarly at a 40-yearhigh.