By simultaneously raising interest rates, central banks could harm the global economy

KONTAN.CO.ID – WASHINGTON. At the same time, central bank efforts to suppress inflation by raising the benchmark interest rate could harm the global economy. Economists worry that central banks will go too far if they ignore their collective impact on global demand.

The central bank’s focus on responding to domestic supply and demand conditions could go too far. Indeed, other central banks have weakened global demand, which is one of the drivers of domestic inflation.

If each central bank tightens too much, the global economy could also decline significantly. The World Bank warns of the cumulative effect of the international impact of this tightening of monetary and fiscal policies.

“A highly synchronous tightening could do more damage to economic growth than would be expected from the simple addition of the effects of each country’s policy actions,” the World Bank report said, as quoted by Wall Street. Newspaper Monday (26/9).

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This risk can be reduced through coordination between central banks, for example when they cut policy interest rates together during the global financial crisis. Likewise in 1985 when the developed countries acted together to drive down the dollar and again in 1987 when they acted together to support it.

Sure. Inflation in the Group of 20 major economies was 9.2% in July, double the level a year earlier, according to the Organization for Economic Co-operation and Development. With interest rates rising, central bankers think they can suppress inflation next year. .

The World Bank said the number of rate hikes announced by central banks around the world was already at its highest level in July since records began in the early 1970s.

On Wednesday, the Federal Reserve announced a 75 basis point increase. Earlier, partner central banks in Indonesia, Norway, the Philippines, South Africa, Sweden, Switzerland, Taiwan and the UK also raised interest rates.

“This is a danger, there is no guarantee that the decision to raise interest rates will ultimately fail to stifle inflation. Central banks have collectively gone too far and pushed the global economy into contraction unnecessarily violent,” wrote former International Monetary Fund chief economist Maurice Obstfeld. .

Most economists agree that inflation in a country is not solely due to the strengths of that country. Global demand also affects the prices of easily tradable goods and services.

This has long been seen in petroleum commodities. When boom in China raised prices in 2008 even as the United States entered a recession.

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This has also been true in recent years for manufactured goods, whose prices have been driven around the world by supply chain disruptions. As in Asian ports, and a growing demand for government stimulus. A Fed study found that US fiscal stimulus boosted inflation in Canada and the UK.

Fed Chairman Jerome Powell noted Wednesday that the central bank has coordinated action on interest rates in the past. He said he was currently in a very different situation. He added that contacts between global central banks are more or less ongoing.

“And that’s not coordination, but a lot of information sharing,” he said.

If coordination is not possible, a more achievable goal might be, as the World Bank suggests, for national decision makers to consider the potential for globally synchronized national spillovers.

Robert Butler

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