In a fight against inflation, major central banks around the world are raising interest rates to a level not seen since 2008. Naturally, central banks use interest rates as monetary policy tools to limit inflation, and all major economies have hiked interest rates at least 2-4 times in 2022 as inflation hits multi-decade highs.
Major central banks lifts interest rates by nearly 1,570 basis points in 2022 in a fight against inflation
The World Bank warned about the possibility of a recession in 2023 due to consistent rate hikes from the central banks. Raising rates makes borrowing more expensive to try to bring down the pace of price rises. But it also makes loans more costly, which can slow economic growth, it said.
Inflation has surged throughout the world as a result of high food and fuel prices caused by the Russian-Ukraine war. Food costs have increased due to a shortage of fertilizers and supply chain disruptions. while crude oil prices have risen due to war-related concerns. Further, energy prices, metal prices, and coal prices have skyrocketed as a result of the sanctions on the Russian economy by western nations. Gas scarcity has pushed European countries toward the edge of a recession.
Before the conflict, inflation was already on the rise due to a slowdown in the global supply chain as countries emerged from Covid lockdowns.
As food and fuel prices skyrocketed, central banks around the world were forced to raise interest rates. Major central banks began raising interest rates in March and have continued to do so until now, with indications that they will do so until December of this year.
Additionally, with the decline in currency values, imports have become more expensive, which has caused inflation to rise further. In response to rising input costs and interest rates, businesses began raising prices for their products, fueling more inflation.
The recent sanctions on the Russian economy by G7 nations have led to gas prices surging as Russian state energy giant Gazprom came up with an announcement just after the G7 proposal saying “we will not resume flows through the pipeline as planned because we have detected an oil leak at the Portovaya compressor station.”
On September 26, the Organization for Economic Cooperation and Development said that the Ukraine Crisis and Covid-19 pandemic have hit the global economy hard in 2022 and the stains of this will continue into the next year.
The report said economic growth worldwide was slowing more than expected as energy prices spike and the resulting inflation crisis takes its toll on demand. The group reduced its global economic growth forecast for 2023 to 2.2 percent, down from 2.8 percent in June, representing around USD 2.8 trillion in lost global output in 2023.
Before this, on September 17, the World Bank warned about the possibility of a recession in 2023 due to consistent rate hikes from the central banks, BBC reported. Raising rates makes borrowing more expensive to try to bring down the pace of price rises. But it also makes loans more costly, which can slow economic growth, it said.
The world bank further said that the global economy was in its steepest slowdown following a post-recession recovery since 1970.
It said a study found that "the world's three largest economies—the US, China, and the euro area—have been slowing sharply."
In addition, according to a survey released on Wednesday by the Switzerland-based World Economic Forum, seven out of ten respondents in a sample of 22 leading private and public sector economists believe a global recession is at least somewhat likely in 2023.
Relentless rate hikes by Major Central banks
The world's largest economy, the United States, began raising interest rates in March. The US Fed delivered five consecutive rate hikes in 2022, bringing the Federal funds rate to 3%-3.25% of the way from zero.
On September 21, the US Fed delivered a third straight three-quarter point increase, pushing borrowing costs to the highest level since 2008 and signaling that they will keep rising well above the current level. Meanwhile, the U.S. dollar index, which measures the greenback against six major currencies, hit 113, its highest level in two decades.
According to media reports, long-term mortgage rates broke 7% this week, reaching highs not seen since 2002. On Tuesday, 30-year fixed mortgage rates averaged 7.08 percent, with 15-year fixed mortgage rates topping 6.3 percent.
In May, annual inflation in the United States accelerated to 8.6%, the highest level since December of 1981.
Bank of Canada: The Bank of Canada raised the target for its overnight rate by 75(bps), to 3.25%, in September 2022. It is the fifth consecutive rate hike, pushing borrowing costs to the highest since 2008. In the second rate hike, the Bank of Canada announced it will end reinvestment and will begin quantitative tightening.
In May, Canada's inflation rate reached a near 40-year high of 7.7%, which is way above the central bank's target level of 2%.
Back then, when the inflation rate hit 12.5% in 1981, the Bank of Canada was forced to raise its benchmark interest rates to 12% to get prices back under control, triggering the deepest economic contraction since the Great Depression, as per media reports.
|Rate hikes in 2022
|US Federal Reserve
|Bank of Canada
|Reserve Bank of Australia
|Reserve Bank of New Zealand
|Bank of England
|Reserve Bank of India
|European Central Bank
|Source: Media Reports, Trading Economics
Bank of England: During its September 2022 meeting, the BOE raised its key interest rate by 50 basis points to 2.25%, marking the seventh consecutive rate hike and pushing borrowing costs to their highest level since 2008.
The BOE started raising rates in December last year with 15(bps) and raised 25(bps) during its February 2022 meeting, which is the first back-to-back increase since 2004.
After the inflation rate reached its highest level since 1992, the BOE delivered a third rate hike in March by raising its key bank rate by 25(bps) to 0.75%.
On the other hand, the British pound plunged to a record low of $1.0382 following the announcement by the new U.K government that it would implement tax cuts and investment to boost growth. To restore the pound, the new U.K government announced a temporary purchase of long-dated UK government bonds from 28 September until 14 October, according to media reports.
European Central Bank: The ECB increased rates by 75(bps) in September 2022, following a 50(bps) rate increase in July. Policymakers also said that interest rates will rise further over the next several meetings.
In an attempt to release inflationary pressure, the ECB raised its interest rates for the first time in its July 2022 meeting, which is the first increase since 2011 by ending eight years of negative rates.
The Euro, the official currency of 19 member countries of the eurozone, is still trading below the parity level of (1.0000) against the dollar. For the first time in nearly 20 years in July, the euro reached parity against the USD.
Reserve Bank of India: The RBI raised interest rates by 50 basis points (bps) at its September 30, 2022, meeting, representing the fourth consecutive rate hike as policymakers increased efforts to reduce inflation. The repo rate now stands at 5.90%, up from 5.40%. The RBI has raised interest rates by 190 basis points (bps) so far in 2022.
India's retail inflation in August surged to 7% on an annual basis, up from 6.71% in July 2022. It remained above the Reserve Bank's comfort level of 6 percent for the eighth consecutive month.
On the other hand, the Indian rupee hit another record low of 82 against the US dollar on Wednesday. So far this year, the Indian currency has lost 9.72% of its value against the US dollar, and since the start of the first rate hike from the US Fed on March 22, the rupee has fallen by 7.12%.
Other central banks, including the Reserve Bank of Australia and the Reserve Bank of New Zealand, both raised interest rates by 225 (bps) in 2022.
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