Global central banks fail to tame inflation despite aggressive rate hikes

Most central banks globally have been hiking interest rates to tame inflation. However, consumer prices have remained high, and the efforts to slow down the economy have not been 100% successful.

Central banks continue hiking interest rates

The global central banks hiking rates include the US Federal Reserve, the European Central Bank, and the Bank of England. However, prices are still high, and there is a risk that policymakers might be forced to do more than expected.

The global economy is still recovering from the supply shocks triggered by the COVID pandemic, and the monetary tightening policies are feared to cause a recession by the end of the year. The ongoing interest rate hikes have already dealt a blow to tech giants that have laid off thousands of employees.

There is uncertainty over whether the rate hikes will tame inflation this time as they have had historically. One of the major blows dealt to the global economy over the past year is the geopolitical tensions in Europe and an unresolved war in the continent. The possibility of inflation dropping and the economy returning to the pre-pandemic state depends on central banks’ decisions in the coming months.

The UK central bank has said a recession is needed to slow inflation. On the other hand, the European Central Bank expects to conquer inflation with no major changes to the unemployment rate. The Federal Reserve has predicted that the unemployment rate will rise slightly, but economic growth will still be seen.

The Fed is still not close to pausing interest rate hikes, with policymakers saying that another 25 basis points hike will be seen in the May policy meeting, which will take the policy rate to levels between 5% and 5.25%. The ECB and the Bank of England are also expected to continue hiking rates.

Possibility of a recession

The corporate profit margins are high, wage pressures remain strong, and the labor market is tight. These factors show that inflation remains high and rates need to be increased. Some policymakers believe the inflation levels will not slow down without a recession.

The unemployment levels across the US have never hiked by 1% within nine months without a recession kicking in. Moreover, the estimate of a 0.4% growth in the gross domestic product expected for 2023 after a strong Q1 2023 shows that the output will drop for the remainder of the year.

Therefore, there is a likelihood that the Fed will only pause the interest rate hikes if the labor market succumbs. The interest rate levels have increased to levels above inflation in the US, and they are becoming more restrictive.

The strength of the US economy will also be determined by the earnings reports released this week. Given the recent banking crisis, the reports will show the resilience of firms and the economy.