Excess pandemic-related money printing and supply chain disruptions have caused inflation to spike to its highest levels in nearly half a century. To combat inflation, the Federal Reserve has resorted to an aggressive monetary tightening strategy which has seen interest rates rise dramatically in 2022.
Central banks worldwide reacted as expected by raising interest rates and tightening the monetary supply. If not done with the utmost care, raising rates could do more than slow down spending; it can lead to a recession. A new report from the U.N. warns that a recession could be on the way.
In a statement released in conjunction with their annual report, the U.N. Conference on Trade and Development (UNCTAD), which monitors the health of the global economy, stated:
“Excessive monetary tightening could usher in a period of stagnation and economic instability. Any belief that they (central banks) will be able to bring down prices by relying on higher interest rates without generating a recession is, the report suggests, an imprudent gamble.”
The report highlights how central bank policies among developed countries, such as the Federal Reserve in the United States, can negatively impact developing countries. These developing countries often rely on loans to fund their ongoing development, so rising rates will slow down and/or halt projects.
Source: Yahoo Finance YouTube
Rebeca Grynspan, Secretary-General of the UNCTAD, commented:
“The current course of action is hurting vulnerable people everywhere, especially in developing countries. We must change course. If you want to use only one instrument to bring inflation down, the only possibility is to bring the world to a slowdown that will end up in a recession.”
Alternatives to the interest rate hikes proposed by Grynspan included windfall taxes on large corporations posting record profits amid supply chain shortages, better regulations on commodity trading and funding supply chain improvements. The UNCTAD revised its 2022 global growth projections from 2.6% to 2.5% in its report. For 2023, the agency is projecting 2.2% growth. However, if the continued tightening of the money supply takes place and a recession comes, these projections will become increasingly unlikely.