In the United States, the United Kingdom, the eurozone, but also in most emerging economies, interest rate increases are happening at a frantic pace to curb inflation.
But critics fear this will end growth. “It reminds me of what used to happen (in ancient times) with bloodletting,” said Joseph Stiglitz, Nobel laureate in economics, referring to the practice of making a sick person bleed to cure him.
“When a patient was bled, it was usually not cured, except for a miracle. The more they bled him, the worse he got. I fear that the central banks are doing the same,” he criticized.
This week, the central banks of the United States, the United Kingdom and the European Union should continue to tighten their belts. The Fed could raise rates by 0.75% or even a full percentage point tomorrow, after four hikes since March. South Africa, Brazil and Sweden are also looking to combat inflation.
The objective is to increase the cost of credit granted to households and companies, slow down the labor market, wage increases and, ultimately, the rise in prices.
However, after six months of war in Ukraine and the devastating consequences in various regions of the world, some are concerned about the consequences of restrictive policies that intervene in a synchronized manner.
“Did the economy need this to slow down?” asks Eric Dor, director of economic studies at France’s Ieseg business school. According to him, “inflation created the drop in activity, households lost purchasing power and the increase in wages is lower than inflation.”
“This represents a brake on consumption,” especially in Europe, where interest rate hikes can further weaken the economy, he says.
“It is possible that it will cause a little loss of growth,” European Central Bank President Christine Lagarde acknowledged at a conference in Paris on Friday. But, in her opinion, “it is a risk that must be taken.”
In the case of the United States, the “fiery numbers” of inflation “have increased the pressure on the Federal Reserve to raise rates by one percentage point,” said Diane Swonk, chief economist at KPMG.
“This will be one of the toughest and most politically charged decisions” for the institution. “It marks the Fed’s first step toward a true recession,” he noted.
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Global recession in 2023
The priority is to stop the rise in prices, also said the head of Economy and Finance for President Joe Biden, Janet Yellen, acknowledging “a risk” of recession in the United States.
The specter of the inflation of the 1970s and 1980s, when prices skyrocketed for almost a decade, is ever present.
The World Bank, for its part, estimated last Thursday that the simultaneous increase in interest rates reinforces the risk of a global recession in 2023, especially in emerging and developing countries, and asks central banks to continue their efforts to reduce inflation.
In addition to the remedy adopted and its side effects, the debate also focuses on the causes of the disease.
According to Stiglitz, the rise in inflation is due less to excess demand than to increases in energy and food prices and persistent blockages in supply chains. Phenomena against which central banks have a much smaller field of action.
“They use a remedy for a misdiagnosis,” the economist points out, warning that in the United States, rental prices could continue to rise under the effect of higher rates, and therefore inflation will persist.
“The risk is that, without having a real impact on inflation, this policy increases the cost in terms of activity and employment,” added Eric Dor regarding Europe.
“A tighter monetary policy will inevitably have economic costs,” the chief economist of the International Monetary Fund, Pierre Olivier Gourinchas, acknowledged in July, specifying that “any delay will only exacerbate them.”
Faced with the limits of monetary policies, the latter had advocated “specific budget support” by governments, a solution on which a consensus is being reached throughout the world, despite its high cost on finances. public already very deteriorated.
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They predict that interest hikes in the world would affect economic growth