Are Central Banks Deliberately Causing a Recession? Fed, ECB and BoE Signal More Rate Hikes

Are central banks deliberately causing a recession? In other words, is recession the only way to bring inflation under control?

A lot of analysts have already said the central banks around the world are in a haste to use a recession a weapon to tame inflation.

'Recession is Foretold'

Now strategists at BlackRock have repeated the claim, saying that a recession is round the corner just because the global central banks want one.

Recession
Recession Pixabay

"Recession is foretold as the central banks race to try to tame inflation," the team of strategists at the world's largest asset manager said, according to Yahoo Finance.

Overtightening Policy

Writing in the 2023 Global Outlook, the strategists went as far as to say that the central banks are "deliberately causing recessions by overtightening policy".

Going a step further the analysts also said the central banks will not step in when the economy is in the grip of a recession.

"Central bankers won't ride to the rescue when growth slows in this new regime, contrary to what investors have come to expect," they said.

New Signals From Fed

To put things in perspective, even as the Blackrock analysts made this comment, Federal Reserve policymakers said they will go for further rate tightening to control inflation. The policy makers suggested on Wednesday that they will push for more interest rate hikes.

The Federal Reserve
The Federal Reserve YouTube Grab

Reuters reported that several policy makers said they support a 5 percent benchmark rate, which they see as a good way to tame inflation. "I just think we need to keep going, and we'll discuss at the meeting how much to do," Cleveland Fed President Loretta Mester said.

The Fed policy rate is in a range of 4.25 percent to 4.50 percent, after a series of aggressive rate interest hikes over the last several months. In mid-December, the US central bank increased benchmark interest rates by 50 basis points bringing the US rates are in the range of 4.25-4.50 percent, which is still the highest since 2007.

No Mood to Stop

The 50 basis point hike was interpreted as a sign that it is moderating the red hot mission to bring down inflation. However, the latest hints from the policymakers mean that they are not in a mood to stop policy tightening in the near future.

European Central Bank
European Central Bank Wikimedia Commons

The Fed's aggressive moves to rein in inflation has been hurting the broader economy, especially sectors like housing. The Fed has been battling accusations that it has gone too quickly on monetary tightening. Fed chief Jerome Powell has denied the charges, saying instead that high inflation will inflict more pain on the economy.

In November, Powell said the fight against inflation is a long one. "It will take time, however, for the full effects of monetary restraint to be realised, especially on inflation ... It's very premature in my view to be thinking about or talking about pausing our rate hike. We have a ways to go," he said.

ECB Stance

The European Central Bank has raised benchmark rates by 2.5 percentage points in the battle against inflation so far. Moreover, it has already suggested that it will likely raise rates by 50 basis points in February and March. The ECB's objective is to get inflation back to 2 percent from the 10 percent levels currently.

Bank of England, London
Bank of England, London Wikimedia Commons

"We must stay the course in our battle against inflation; it's not yet won," French central bank chief Francois Villeroy de Galhau said at a World Economic Forum (WEF) panel discussion in Davos on Wednesday, according to Reuters.

In the UK, where inflation is still above the 10 percent levels, the Bank of England (BoE) is expected to raise interest rates by another 50 basis points in February.

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