AA / Istanbul
Two years ago, central banks around the world were scrambling to stimulate their markets through a series of stimulus packages and near-zero interest rates, to weather the economic impacts of the spread of the coronavirus pandemic. Covid-19.
Currently, central banks, notably those of the United States and of the countries of the euro zone and of the economies of the most developed states, are paying part of the price resulting from the stimulus measures, the recovery plans and the injection of liquidity in the markets as well as certain geopolitical factors which caused an increase in inflation.
The United States recorded, last March, an inflation rate established at 8.5%, its highest level since December 1981, while the Federal Reserve is working to curb this inflationary trend .
– Rise in interest rates
One of the main tools used to curb inflation is to raise interest rates, which the US Federal Reserve did in March; a measure that it is preparing to repeat in 2022.
High global inflation, particularly in commodity prices such as food, which has reached unprecedented historic highs, according to the Food and Agriculture Organization of the United Nations (FAO), is occurring in when the markets have not yet recovered from the consequences of Covid-19.
Today, central banks are fighting on two fronts by resorting to the same tool, namely the key rates which lead to the reduction of the money supply in force on the markets, and its transfer to the banks in the form of deposits, so that their owners benefit from the interest rates applied there.
In return, these banks are working to remedy the economic and monetary imbalances generated by the spread of Covid-19. One of the main tools implemented to stimulate the markets is the reduction of interest rates, which is the opposite of the solution of the crisis of high inflation.
It is in this situation that central banks find themselves at a crossroads, should they work in the interests of consumers by bringing down high inflation, or will they move towards stimulating markets and inducing investments to create jobs through the obligatory passage of keeping interest rates low?
– Curb inflation
It appears from the various indices that the central banks will solve the inflation crisis and will place this as a priority, insofar as consumer prices represent a pressure factor and a burden for economies, purchasing power and consumers, particularly for emerging and developing economies.
The majority of central banks in the world raised their key rates in March, following the decision of the American Federal Reserve to raise its rate and which is preparing to raise this rate four times during this year, which might constitute a danger to other world markets.
The increase in the key rates might curb inflation but at the same time this measure might discourage the incentive and the revival of the markets, since the monetary liquidities required for the investments on the markets and to thus create new jobs employment and provide wages will be transferred to banks in the form of deposits.
– La stagflation
Global fears have recently increased that rising key rates and the failure of central bankers’ efforts to curb inflation will lead to the onset of what is called stagflation.
Stagflation is an accelerated rise in the prices of commodities in particular, like what is happening today, and which is accompanied by a sharp drop in demand, that is, high prices and low demand.
Stagflation will lead to a situation of low consumer demand, while this decline will not lead to a drop in product prices, due to the increase in production costs, which will result in a concomitant stoppage of production and consumption.
In the UK, for example, consumer and business confidence declined last March amid rising inflation, pointing to potential stagflation in the coming months. .
Britain’s consumer confidence index fell 5 points to -31 in March, the fourth straight decline in 17 months.
The UK Consumer Confidence Index is a measure of how people perceive the state of their personal finances and the economic outlook.
Stagflation paints a bleak picture for the economy over the next few months. Inflation coupled with stagnation (stagflation) refers to unusual periods of slowing combined with rising inflation.
The Russian attack on Ukraine has caused a severe inflationary shock by causing prices to rise at a time when energy supplies are threatened and incomes of both households and businesses are falling, as the prices of commodities have become more expensive.
In figures, oil prices have increased by 60% this year with an average of 107 dollars per barrel. The price per barrel stood in April 2021 at 66 dollars.
As for staple food prices, the FAO Food Price Index rose 33.6% in March on an annual basis, to 159.3 points, i.e. the highest historical level of the index since its launch in 1990.
*Translated from Arabic by Hatem Kattou
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