Global interest rates rise while recession concerns grow

NEW YORK • Nearly four dozen countries have raised interest rates in the past six months as central banks in the United States, Britain, India and other nations push borrowing costs higher in hopes of containing the most rapid inflation in decades.

The question now is whether the global economy will be able to withstand a cycle of rate increases unlike any it has recently - and possibly ever - experienced.

The outlook is not promising.

"The war in Ukraine, lockdowns in China, supply chain disruptions and the risk of stagflation are hammering growth," World Bank president David Malpass said in a report this month.

"For many countries, recession will be hard to avoid."

The US Federal Reserve last Wednesday drove up its benchmark policy rate - its third increase this year and its biggest since 1994. Within hours of the Fed's move, Brazil, Saudi Arabia and others announced rate changes. Switzerland and Britain followed suit a day later.

At least 45 countries have lifted rates so far this year, data from FactSet shows, with more moves to come.

The Monetary Authority of Singapore (MAS) has adjusted monetary policy three times since last October - most recently in April - to slow the inflation momentum, and another move could be on the cards at its next meeting in October, some analysts have said.

Almost all of Singapore's inflation is imported, so unlike most central banks that target interest rates, MAS adjusts monetary policy by managing the strength of the Singapore dollar against a basket of currencies of the Republic's major trading partners.

Earlier this month, private sector analysts surveyed in Singapore shaved their growth forecast for this year to 3.8 per cent - from the 4 per cent growth tipped in the previous survey released in March - citing a sharper than expected rise in inflation as one of the downside risks for the economy.

Higher interest rates are powerful tools for fighting rising prices: They make borrowing money more expensive, which weighs on consumer demand and business expansion, in turn cooling economic growth and slowing hiring.

That can translate into weaker wage growth for households and less pricing power for companies, eventually pulling down inflation.

It is a delicate balancing act, one that puts pressure on policymakers to rein in the economy without sending growth tumbling.

"Persistent inflation pressures and deteriorating expectations are forcing central banks to become more aggressive," economists at Barclays wrote on June 10.

"As financial conditions worsen and sentiment drops, the real economy could follow."

The Fed is poised to continue raising rates this year, probably at a rapid pace. The European Central Bank has signalled it will raise rates next month for the first time in 11 years, and investors increasingly believe it will move quickly as it tries to slow the economy.

The Bank of Canada may also announce a large increase next month, after having raised rates two weeks ago. Similar shifts have been announced by many of the world's largest economies.

Before the Covid-19 pandemic, economists thought the world might be stuck in a low-rate, low-inflation, slow-growth trap - and many of the world's economies began to push rates down.

But after the pandemic started, government stimulus spending packages meant to cushion against the economic fallout ended up stoking demand. Supply chains were roiled by factory shutdowns, shipping woes and labour shortages. Combined, those forces revived long-dormant price pressures.

So far, inflation shows little sign of easing. US consumer prices picked up again in a report earlier this month as fuel prices surged and a variety of goods and services grew sharply more expensive.

The war in Ukraine could continue to push up commodity prices, while efforts to contain the coronavirus in China and worker unrest in South Korea threaten to further disrupt the manufacturing of parts.

NYTIMES