2023-07-29 03:05:58
Xinhua News Agency, Washington, July 27 (International Observation) The Fed’s continued interest rate hikes have exacerbated global economic risks
Xinhua News Agency reporter Xiong Maoling and Shi Chun
The US Federal Reserve Board announced on the 26th that it will raise the target range of the federal funds rate by 25 basis points to between 5.25% and 5.5%, pushing the interest rate to the highest level in 22 years. This is the 11th rate hike since the Fed entered the current rate hike cycle in March 2022, with a cumulative rate hike of 525 basis points.
Experts pointed out that the continued rate hikes have led to a slowdown in US economic growth, increased pressure on the financial system, and further aggravated the already heavy debt burden, which will bring negative spillover effects to the global economy. In addition, the Federal Reserve’s substantial interest rate hike has also pushed up the debt repayment costs of emerging markets and developing economies, exacerbating their capital outflow risks, which in turn led to turbulence in the global financial market and increased economic downturn risks.
The day before the Federal Reserve’s announcement to raise interest rates, Pacific Western Bank, which had previously suffered a sharp drop in its stock price due to the loss of deposits, announced that it would be acquired by the smaller Bank of California. This is another example of the Federal Reserve’s aggressive interest rate hikes that have shaken the banking industry following the closure of Silicon Valley Bank and Signature Bank in March and the closure of First Republic Bank in early May.
Desmond Rahman, an economist at the American Enterprise Institute, told Xinhua that he thinks we will see a large number of other regional bank failures. The “Wall Street Journal” previously reported that the chain reaction of US bank failures and increased pressure on the financial system may lead to tightening of credit, and the global economy may further slow down as a result.
The Fed’s aggressive interest rate hikes have led to a rise in U.S. Treasury yields and a stronger U.S. dollar, prompting a large-scale flow of international capital from emerging markets to the U.S. in pursuit of higher returns. As a result, financial markets in many countries have been severely impacted. In order to avoid sharp fluctuations in the exchange rates of their own currencies, capital outflows, and increased imported inflation, these countries have to follow suit to raise interest rates, bringing risks to their own economic growth.
Rahman said that the U.S. interest rate hike has caused a large amount of capital outflow in emerging markets, which has led to a sharp depreciation of currencies in emerging markets, while higher interest rates have increased debt repayment costs in emerging markets and pushed up the debt risks of highly indebted emerging market economies. A large number of low-income countries are already in debt distress.
Mohammad Lardy, a professor of economics at Cairo University in Egypt, said: “For emerging market economies that have suffered greater economic impact due to the Ukraine crisis, the Fed’s rate hike will increase the uncertainty and instability of their economic prospects.”
The International Monetary Fund (IMF) released an update on the “World Economic Outlook Report” on the 25th, pointing out that the world economic growth is still weak, and the measures of raising policy interest rates by many central banks to curb inflation continue to put pressure on economic activities. At present, there are still multiple downside risks to world economic growth, including persistent inflation, re-pricing of financial markets, and increasing debt pressure in emerging markets and developing economies.
For enterprises, the continuous rise in interest rates forces more and more enterprises to refinance in a high interest rate environment, which may trigger a wave of global corporate debt defaults. The results of a survey of corporate chief risk officers released by the World Economic Forum recently showed that rising interest rates have reduced demand and pushed up borrowing costs, making debt pressure or debt default a very real concern. Nearly a quarter of those surveyed said the debt problem was very likely to have a “severe impact” on their organization this year.
Moody’s Investors Service estimates that the global risky debt default rate will peak at 5.1% early next year. The firm believes that under a “seriously pessimistic” scenario, the default rate on high-risk debt might jump to 13.7% within a year, higher than the peak of 13.4% during the 2008 international financial crisis. (Participating reporters: Xu Chao, Xu Supei)
Editor: Wu Jiahong
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