The United Nations has begun to be concerned about the Federal Reserve. Earlier this week, the United Nations Conference on Trade and Development said that the Federal Reserve and other central banks were driving the economy into a recession by hiking interest rates.
The UN study stressed rising borrowing costs, which might further reduce demand, and warned of a lengthy period of slow growth, high unemployment, and high inflation. Another focus was on emerging economies, which were heavily damaged by the pandemic and COVID-19. According to the research, a percentage point increase in interest rates by the Federal Reserve reduces economic output by 0.5% in rich countries and 0.8% in poor countries over the next three years.
Over the next three years, underprivileged countries will lose more than $360 billion in economic output. If it continues, inflation might affect the global economy much more. Even in the civilised world, not everything is perfect. The yearly percentage change in the consumer price index in the United Kingdom was 10.1% in July 2022, 8.5% in the United States, 7.5% in Germany, 6.1% in France, 7.9% in Italy, and 7.6% in Canada.
The conflict between Russia and Ukraine, which has hurt Ukraine’s exports of goods, is to blame for the issue. Ukraine exported about 1 million tonnes of wheat, corn, and barley in June 2022, a 40% decrease from June 2021. To put things into perspective, Ukraine produces 4% of the world’s wheat and 30% of the world’s sunflower oil.
Around 77% of India’s imported sunflower oil came from Ukraine in 2019. As a result of the war, the price of key agricultural goods saw a sharp increase. Wheat prices nearly quadrupled before declining. Prices for corn and barley more than doubled. Prices for palm oil, rapeseed oil, and sunflower oil all surged by 200%, contributing to the problems with worldwide inflation.
In the 27 member states of the European Union, the cost of bread has increased by more than 15% year over year (YoY), while the cost of oils and fats has increased by more than 30% yearly. Prices for bread, oils and other food items have increased by more than 40% in Bulgaria during the past year. Similar patterns have been observed in other important European economies. Because of their policies, Western economies are ill-prepared to deal with such high inflation.
In Germany, for example, annual inflation has risen from 2% to 10% in the last fifteen months. After 2008, Germany’s inflation rate remained stable at about 2% for the next fourteen years. For July 2022, the yearly percentage change in the consumer price index for energy was 36% in Germany, 28% in Canada, 28.65% in France, 42.96% in Italy, and 57% in the United Kingdom. Thus, energy and food are the two key commodities fueling the Western world’s inflation problem.
Beginning with Sri Lanka, Pakistan, and Bangladesh, the United Nations report’s predicted economic crisis hints are already there. Many nations in Europe have already started to limit energy. Given the pressure on imports, Japan is dealing with inflation and rising food costs for the first time in decades. One question that no one can definitively answer is how far the central banks can go in addressing this issue given that inflation stems from the supply side rather than the demand side. The Federal Reserve began to raise interest rates beginning in May 2004 and continued to do so until the collapse of Lehman Brothers, which set off the current Great Recession.
The unexpected rise in interest rates was caused by the breach of the $150 threshold in oil prices. The real estate bubble burst as a result of monetary policy tightening, precipitating the crisis. A decade of loose monetary policy ensued as central banks attempted to halt the slide that began in 2008. Analysts believe that the present increase in interest rates is akin to the years preceding 2008, and that a recession in 2023-2024 is thus unavoidable.
By the end of 2021, the interest rate in India was 4%, compared to 0.5% in the Eurozone, 0.25 in the UK, and 0.7% in the US. The estimates for 2022 and 2023 have now thrown the central bank’s instruments for a loop after the inflation storm caused by the Russia-Ukraine war. According to projections, the interest rate at the end of 2022 would be 6.25 percent in India, 2% in the Eurozone, 3% in the UK, and 4.08 percent in the US.
Forecasts show that by the end of 2023, interest rates in India will be around 6.25 percent, 2.25 percent in the Eurozone, 3.25 percent in the United Kingdom, and 3.33 percent in the United States, explicitly accounting for the drop in the price of petroleum and natural gas, as well as the end of the conflict in Ukraine. Several bubbles have been shattered by the abrupt tightening of monetary policy, similar to the 2008 housing crisis. Corrections in numerous large online enterprises, non-fungible tokens, and even cryptocurrency are examples.
Mortgage payments are increasing as interest rates rise, posing another problem for customers. In the United Kingdom, for example, monthly mortgage payments are climbing by up to 50%. Home loan interest rates in India increased from 6.5% to 8.25%, resulting in lengthier payback lengths. Loans that were scheduled to be paid off in 20 years would now be paid off in 24 years at the same monthly rate. When paired with inflation in other sectors, this has an immediate impact on demand.
Typically, raising interest rates is excellent for an overheating economy. However, in this instance, the economy was just emerging from almost two years of cold storage. Additionally, because the OPEC+ group is now going to reduce oil output by 2%, the supply-side issue will only increase, particularly in Europe. Therefore, because the existing system is ineffective for the typical consumer, central banks will eventually have to decide between financial stability and rising interest rates.