FILE PHOTO: Signage is seen outside the European Central Bank (ECB) building in Frankfurt, Germany. REUTERS/Wolfgang Rattay
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CENTRAL banks are intent on driving the world economy perilously close to a recession.
Late to see the worst inflation in four decades coming, and then slow to crack down on it, the Federal Reserve (Fed) and its peers around the globe now make no secret about their determination to win the fight against soaring prices – even at the cost of seeing their economies expand more slowly or even shrink.
About 90 central banks have raised interest rates this year, and half of them have hiked by at least 75 basis points in one shot. Many did so more than once, in what Bank of America Corp (BofA) chief economist Ethan Harris labels “a competition to see who can hike faster”.
The result is the broadest tightening of monetary policy for 15 years – a decisive departure from the cheap-money era ushered in by the 2008 financial crisis, which many economists and investors had come to view as the new normal.
The current quarter will see the biggest rate hikes by major central banks since 1980, according to JPMorgan Chase & Co, and it won’t stop there.
‘Bring some pain’
This week alone, the Fed is set to lift its key rate by 75 basis points for a third time, with some calling for a full percentage point salvo after US inflation again topped 8% in August.
The Bank of England (BoE) is predicted to boost its benchmark by 50 basis points, and hikes are also expected in Indonesia, Norway, the Philippines, Sweden, and Switzerland, among others.,
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As they slam on the brakes, policymakers are starting to lace their language with gloom in a public acknowledgement that the higher they raise rates to quell inflation, the bigger the risk they harm growth and employment.
Fed chairman Jerome Powell said last month that his campaign to rein in prices “will bring some pain to households and businesses.”
European Central Bank (ECB) executive board member Isabel Schnabel speaks of the “sacrifice ratio,” jargon for the loss of output that will be needed to control inflation.
The BoE goes as far as to predict a United Kingdom recession will be under way by the end of this year and may stretch into 2024.
There’s little doubt that the monetary medicine will hurt.
The question is, how much?
Analysts at BlackRock Inc reckon that bringing inflation back to the Fed’s 2% goal would mean a deep recession and three million more unemployed, and hitting the ECB’s target would require an even bigger contraction.
Adding to the uncertainty is the lag before rate hikes affect the economy, in addition to the makeup of today’s inflation, much of which stems from energy and other supply shocks that central bankers can’t control.
Last week’s higher-than-expected US inflation number for August sent the stock market into its steepest dive in more than two years, driven by bets on tighter Fed policy. Billionaire hedge fund manager Ray Dalio sees the prospect of a slump of more than 20% on equity markets as rates continue to rise.