2023-07-07 13:22:30
Inflation is declining, but at a slower rate than the target
Major central banks around the world resorted to raising interest rates at the fastest pace since the 1990s, in an attempt to rein in inflation rates that reached record levels under the influence of the consequences of the crises facing the international economy, starting with the consequences of the Corona pandemic and then the war in Ukraine and the accompanying crises. extended.
However, these policies have not yet fully yielded the desired results in reaching target rates or safety limits for inflation rates.
And while officials in the world’s 20 largest economies in particular have raised interest rates rapidly since they began tightening borrowing costs, neither Federal Reserve Chairman Jerome Powell nor European Central Bank President Christine Lagarde yet expect inflation to return to their common target of 2. percent before the beginning of the year 2025.
While core consumer price indices have fallen, central bankers are pointing to rising core inflation (which excludes food and energy), tightening labor markets, and pressures in the service sector as evidence that prices will continue to rise for some time yet. So the question now arises: What explains persistent inflation in the face of sharp increases in interest rates?
A report published by the British newspaper “Financial Times” states that “it takes time for monetary policy to fully show its effects on spending patterns and prices… It usually takes regarding 18 months because the effect of one increase in the interest rate is fully spread on the spending pattern and prices.”
Monetary policy makers started raising interest rates a year and a half ago in the United States and the United Kingdom, and less than a year ago in the eurozone, above the neutral interest rate (the level that does not directly affect stimulating or constraining economic growth, meaning that they are trying to constrain activity economy and inflation by increasing the cost of borrowing).
Some bankers believe that the time periods required for the effect of monetary policy may be longer in this case. Some of them believe that the impact of that policy may be less effective this time, that is, it may take longer to affect the economy and reduce inflation effectively.
More pain!
The economic thinker, professor of economics at Western University, Michael Parkin, believes that reaching the target rates of inflation at the limits of 2 percent requires “more pain.”
He says, in exclusive statements to the “Sky News Arabia Economy” website, that “to return inflation to the primary goal, it is necessary to raise interest rates more than the increase in the inflation rate, to cause some pain, and to stop demand exceeding supply.”
And Barkin adds: “No central bank has raised the interest rate in its policy enough to achieve the desired result.. They are working on the illusion that they can return inflation to the target through a (soft landing), and this has never happened, and it will not happen,” he said.
Increased borrowing costs
But on the other hand, the danger is that a return to an inflation rate of 2 percent may require central bankers to increase borrowing costs to the point where they endanger the health of the financial system, according to the “Financial Times” report, which quoted the chief global economist at Capital Economics. , Jennifer McCune, saying that high interest rates are “driving most advanced economies into recession in the coming months.”
The report also monitored a group of other factors that led to the delay in curbing inflation despite the interest rate hike in this manner, among these factors:
– Changes in the housing market, which may cause interest rate increases to take longer to affect the economy. In particular, in some countries, the proportion of households who own their homes outright or rent them out has increased. Fixed rate mortgages are also becoming more popular than flexible loans.
Tight labor markets: The followingeffects of the coronavirus pandemic on employment trends are still being felt. The widespread shortage of labor – especially in the services sector – continues, which promotes wage growth and thus fuels inflation rates.
Thus, structural changes in important parts of the economy – including the housing and labor markets – between now and the 1990s may explain why higher interest rates had a sharper and faster impact then.
Delay in raising interest
In exclusive statements to “Sky News Arabia Economy”, the CEO of the “Quorum” Center for Strategic Studies, Tariq Al-Rifai, analyzes the current scene, saying: All central banks have been late in raising interest rates since the pandemic period, with the appearance of the market’s reaction in the year. 2021 and strong support by central banks and governments as part of attempts to recover from the Corona crisis, and with the rise in inflation rates, which the US Federal Reserve believed was a temporary rise and did not raise interest.
In this context, central bankers’ initial insistence that inflation would prove short-lived led to delays in abandoning decades of ultra-loose monetary policy.
So these delays may have made it harder to beat inflation at higher rates, as price pressures have widened from a problem affecting a small number of products hit by supply chain bottlenecks to a broader phenomenon, affecting almost all goods and services.
Returning to Al-Rifai’s statements, he indicates that the US Federal Reserve, which was one of the first central banks to raise interest rates, was stronger than other banks, both the European Central Bank and the Bank of England, “and therefore we see that the inflation rate in Europe and England is higher than the United States.”
He added, “Central banks have not yet reached the target level of 2 percent, while the US Federal Reserve is relatively close to this rate.”
continue to raise interest
The CEO of the “Korum” Center for Strategic Studies expects that the US Federal Reserve will raise interest rates by 25 basis points by the end of the month, provided that the European Central Bank will also continue to raise interest rates, because the inflation rate is still high, stressing that “the Fed is successful so far.” trying to control inflation.
In June, the US Federal Reserve decided to fix key interest rates within the range of 5 and 5.25 percent for the first time since January 2022.
– After the Fed raised interest rates 10 times in a row, starting in March 2022, the Fed’s interest rate-setting committee voted in favor of maintaining current interest rates.
– The minutes of the last US Federal Reserve meeting showed that most officials indicated that there is a high possibility of further tightening of monetary policy, but at a slower pace, during the current year.
The minutes, which were published on Wednesday, showed that the US Federal Reserve’s monetary policy makers had overwhelmingly supported “leaving the interest rate unchanged” at the June meeting, despite some’s desire to raise rates, due to concerns regarding growth in the world’s largest economy.
On June 15, the European Central Bank raised the three main interest rates by 25 basis points (0.25 percent), and most market observers expect a similar increase in July.
Al-Rifai refers to the problem that central banks face, which is linked to the risks of raising interest rates due to the fragility of banks, especially in Europe, and the crisis of the real estate sector, especially in Britain, explaining that those fears that control the financial markets must balance between controlling inflation and supporting banks and the real estate sector.
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