AFP

Central banks worldwide are using aggressive interest rate hikes to lasso galloping inflation, at the risk of pulling down the global economy with it.

The US Federal Reserve and its counterparts in Europe and most emerging economies have been raising rates this year as consumer prices have soared to decades-high levels.

While higher rates aim to tame runaway inflation by slowing economic activity, they can cause a recession if borrowing costs become too steep for businesses and individuals.

“It reminds me what used to happen in the Middle Ages: bloodletting,” Nobel laureate economist Joseph Stiglitz told AFP, referring to the belief at the time that patients could be cured from illnesses by making them bleed.

“When they let out the blood, the patient didn’t recover, usually, unless a miracle happened. And so they let out more blood and the patient got sicker and sicker,” Stiglitz said.

“I am afraid that central banks will do the same thing now,” he warned.

The Federal Reserve will announce its latest monetary policy decision on Wednesday, with investors fearing that after two straight rate increases of 0.75 percentage points, the bank could go for a full point this time.

The Bank of England and its peers in South Africa, Sweden and Switzerland are also expected to continue to tighten their monetary policies at their own meetings this week.

– ‘Transitory’ no more –

Consumer prices began to rise due to bottlenecks in supply chains as companies struggled to keep up with a pick-up in demand after economies began to emerge from Covid lockdowns.

After repeatedly describing inflation as “transitory” last year, the Federal Reserve and the European Central Bank changed their tune this year as Russia’s invasion of Ukraine caused energy and food prices to soar.

Central banks have since raised hikes in an almost synchronised way, raising concerns that their late and aggressive reactions could now do more harm than good.

“Did the economy really need this to slow down?” said Eric Dor, director of economic studies at the IESEG school of management in France.

“Inflation itself caused activity to slow down,” Dor said. “Households are losing their purchasing power, wages increases are lower than the inflation rate and (inflation) put a brake on consumption.”

ECB President Christine Lagarde acknowledged the possible hit to the economy last week.

“Will it cause a little loss of growth? It’s possible,” she said Friday at a conference in Paris. “It is a risk that we have to take after weighing it well.”

Earlier this month, US Treasury Secretary Janet Yellen said there is “certainly a risk” of an economic downturn.

But she noted the US job market is “exceptionally strong” with nearly two vacancies for every worker looking for a job.

– ‘Wrong prescription’ –

The United States is still haunted by the spectre of inflation that lasted for almost a decade in the 1970s and 1980s.

A World Bank report released last week said a worldwide slowdown accompanied by tighter monetary policies could trigger a global recession next year, with sharp declines in emerging and developing countries in particular.

While economists debate whether the cure for inflation might be worse than the disease, some disagree over the reasons behind the soaring prices.

Stiglitz said demand is not the cause.

“Central banks around the world are pretending or acting as if it was demand that created inflation,” he said, noting that higher rates will neither produce more energy nor food or help ease the global supply chain crisis.

“Using a recipe for the wrong diagnosis is getting the wrong prescription,” he said, adding that higher rates will raise the cost of making the investments needed to relieve the bottlenecks and raise rents in the United States.

Russia’s invasion of Ukraine may cause long-term grain prices to rise seven percent, according to a study on Monday showing how expanded production elsewhere to compensate would lead to higher greenhouse gas emissions.

Russia and Ukraine are global breadbaskets, together exporting about 28 percent of the world’s wheat supply.

Russia’s blockade of Black Sea ports and sanctions on Moscow have caused short-term price surges and triggered fears of an acute hunger crisis. 

Researchers in the United States and Uruguay modelled the likely impact of the conflict on wheat and maize prices over the coming 12 months, looking at a variety of scenarios.

One model found that if Russian grain exports were halved and Ukrainian exports significantly reduced during that time, maize would be 4.6 percent more expensive and wheat 7.2 percent more expensive — even assuming that other exporters could step in and fill the shortfall. 

They said the price increase would persist as long as exports remained restricted.

To close the supply gap, the study found that other major producers would need to expand their grain growing areas significantly. 

Were all grain exports from Ukraine to cease, Australia would need to expand its wheat area by 1 percent, China by 1.5 percent, the European Union by 1.9 percent and India by 1.2 percent, according to the model.

This land-use change would lead to just over a billion tonnes of additional carbon dioxide equivalent added to the atmosphere, according to the study published in Nature Food. 

“The cropland expansion resulting from the war in Ukraine is occurring at the expense of more carbon emissions,” said lead author Jerome Dumortier, a researcher at the O’Neill School of Public and Environmental Affairs in Indianapolis, US.

United Nations chief Antonio Guterres warned in July that Russia’s invasion of Ukraine had combined with the lingering trade impacts of Covid-19 to create an “unprecedented global hunger crisis”.

Figures from the UN’s Food and Agriculture Organization show food prices are currently more than 10 percent higher than they were a year ago. 

Although Moscow and Kyiv reached an agreement in July to resume some grain exports, there are fears that the conflict could lead to years of elevated food prices. 

Dumortier said that it was not currently clear whether other grain producers were able to meet global demand, meaning prices could rise even further than predicted in the models. 

“There are drought conditions in South America, Europe, and China, and export restrictions from various countries,” he told AFP. 

“Given those hinderances to full adjustment, commodity prices may be higher than what is estimated in the paper.”

The Lebanese pound fell to a new low against the US dollar on the black market Monday as a severe economic downturn has sparked bank hold-ups by angry depositors and anti-government protests.

Recent weeks have seen a spate of incidents in which people armed with real or toy guns held up banks to demand access to their frozen savings, only to be celebrated as folk heroes.

Amid the turmoil, the pound plunged to 38,600 against the greenback on Monday, according to websites monitoring the exchange rate, a record low for the beleaguered currency.

For decades, the Lebanese pound was pegged at 1,507 to the dollar, meaning that it has lost around 95 percent of its black market value since 2019.

At the Justice Palace in Beirut on Monday, dozens stormed through a metal gate outside to protest the detention of two people over last week’s bank hold-ups.

Elsewhere, activists angered by Lebanon’s deep economic crash blockaded roads in the capital and in the northern port city of Tripoli. 

A financial crash widely blamed on government corruption and mismanagement has caused the worst economic crisis in Lebanon’s history.

Lebanese banker Saeb El-Zein said the pound’s decline was due to a rising demand for dollars on the black market following the government’s decision to lift state subsidies, including on fuel. 

– ‘Slow progress’ –

With four out of five Lebanese now living in poverty according to the United Nations, the country has been desperately seeking a bailout from the International Monetary Fund.

An IMF delegation arrived in Lebanon on Monday to follow up on the implementation of the reforms it demands, following a staff-level agreement in April on a $3 billion loan programme.

“There’s been slow progress in implementing some of the critical actions that we think are required to move forward with a programme,” IMF spokesman Gerry Rice said last week.

Amid the painful crisis, Lebanese depositors have been locked out of their foreign currency savings by banking controls that have gradually tightened since 2019.

Banks have in the past been targeted in street protests, often leaving their windows and ATMs smashed. 

Now, many frustrated depositors, unable to transfer or withdraw their dollar deposits, have resorted to desperate bank heists to free their money.

Lebanon saw at least seven such hold-ups last week, five of them on a single day.

As a result, Lebanese banks sealed their doors on Monday as part of a three-day closure due to the mounting security concerns.

Switzerland signed a controversial contract on Monday to buy 36 US F-35 stealth fighter jets at a cost of more than six billion francs ($6.2 billion). 

“National Armaments Director Martin Sonderegger and the Swiss F-35A Program Manager Darko Savic signed the procurement contract on 19 September 2022 at armasuisse in Bern,” said armasuisse, the country’s arms procurement agency.

“With this, the procurement of 36 F-35A is contractually agreed,” it added.

The selection of the F-35 by the Swiss government in June 2021 sparked some controversy, particularly in light of the cost-overruns of the fighter programme in the United States.

But a Swiss parliamentary investigation did not call into question the selection of the fighter.

The Swiss government and parliament also short-circuited holding a referendum on the plane’s purchase despite enough signatures being collected to put the issue to voters, saying there was not enough time to do so before manufacturer Lockheed Martin’s offer expires.

But Swiss voters had already narrowly approved in September 2020 spending six billion Swiss francs to replace the country’s fleet of ageing F/A-18 Hornets and F-5 Tigers.

The F-35s will be delivered between 2027 and 2030.

Switzerland joins a growing number of European countries which have opted for the stealth multi-role combat aircraft, including Belgium, Britain, Denmark, Finland, Italy, Greece, Germany, the Netherlands, Norway, and Poland.

Stock markets dropped again Monday, extending last week’s rout as investors brace for another big rate hike by the US Federal Reserve that they fear could drag down the global economy.

Wall Street opened lower, with the Dow dropping 0.6 percent.

The Paris CAC 40 and Frankfurt DAX were down in afternoon trading while Asian indices mostly closed lower. London was closed for the funeral of Queen Elizabeth II. 

“Traders are worried that they are going to hear more hawkish stance from central banks this week” which would “cut economic activity further,” AvaTrade analyst Naeem Aslam told AFP.

The Fed will announce its latest monetary policy decision on Wednesday as it seeks to tame decades-high inflation.

With recent data showing US inflation rooted at four-decade highs, investors are increasingly pessimistic about the outlook for the global economy.

Central banks raise interest rates to cool inflation, but higher borrowing costs also slow down economic activity.

Disappointing US inflation figures last week unnerved traders and ramped up bets for a third successive 0.75-percentage-point rise, while some have predicted a whole percentage point move.

Policymakers, including Fed chairman Jerome Powell, have repeatedly said their ultimate aim is to bring inflation under control, even if that means sending the economy into recession.

“We’re expecting a sharp interest rate increase and therefore a clear signal against galloping inflation,” said Tim Emden, an independent market analyst.

Patrick O’Hare at Briefing.com said that a good question is why stock markets are still falling when they already took a wallop last week on the prospect of higher interest rates triggering an economic slump.

“The reason being is that the market doesn’t have a comforting sense where the end rate will be, how long the end rate will remain the end rate, and how low earnings estimates will go,” he said.

The Bank of England and its peer in Japan are also holding key meetings this week, with the pound and the yen feeling the pressure from a strong dollar.

– Yen under pressure –

Asian equity investors continued the selling on Monday.

Hong Kong closed down one percent, even after reports that the city’s government was considering ending mandatory hotel quarantine for incoming travellers.

Shanghai was also down despite news that megacity Chengdu was ending a two-week Covid-19 lockdown that saw 21 million people affected.

Tokyo was closed for a holiday.

The prospect of more big Fed rate hikes is also keeping the dollar at multi-decade highs against its major peers, with the yen feeling most of the pressure as the Bank of Japan refuses to tighten policy.

The Japanese unit last week hit a fresh 24-year low of 144.99 to the dollar, though it has bounced slightly after comments from BoJ officials that signalled they were ready to intervene to provide support.

Oil prices tumbled around three percent despite the news out of Chengdu as demand fears are fuelled by the growing fear of recession around the world.

“The market’s growth concerns, meanwhile, are being fed by the inverted yield curve and are manifesting themselves in the commodities market,” O’Hare said.

An inverted yield curve is the unusual situation where short-term interest rates are higher than long-term interest rates, and is often a signal of an impending recession.

– Key figures at around 1330 GMT –

New York – Dow: DOWN 0.6 percent at 30,722.56

EURO STOXX 50: DOWN 0.7 percent at 3,499.78

Frankfurt – DAX: DOWN 0.3 percent at 12,707.24

Paris – CAC 40: DOWN 1.0 percent at 6,015.85

London – FTSE 100: Closed for queen’s funeral

Hong Kong – Hang Seng Index: DOWN 1.0 percent at 18,565.97 (close)

Shanghai – Composite: DOWN 0.4 percent at 3,115.60 (close)

Tokyo – Nikkei 225: Closed for holiday

Pound/dollar: DOWN at $1.1369 from $1.1423 on Friday

Euro/pound: UP at 87.79 pence from 87.00 pence 

Euro/dollar: DOWN at $0.9983 from $1.0018

Dollar/yen: UP at 143.45 yen from 142.91 yen

West Texas Intermediate: DOWN 3.5 percent at $81.81 per barrel

Brent North Sea crude: DOWN 2.7 percent at $88.67 per barrel