Recession now appears the price to pay for beating inflation

Author: Agencies

After underestimating the worst inflation outbreak in decades, central banks are now driving their economies headlong toward recession in order to tame prices.

The stark outlook is stoking fears that policy makers will end up overreaching as they push ahead with aggressive interest-rate hikes, just as some now concede they overstimulated through the pandemic recovery.

Such fears were elevated on Friday after reports showed business activity unexpectedly contracting across the US and euro-area for the first time in more than two years.

For now, central banks across many advanced and emerging economies have little option but to keep on hiking in the face of inflation that has yet to peak. Bloomberg Economics sees global inflation edging up from 9pc year-on-year in the second quarter to 9.3pc in the third quarter before slipping back to a still uncomfortable 8.5pc by year end.

The speed of tightening is making a soft landing harder to achieve. Citigroup Inc. economists put the chances of a global recession at 50pc while Bank of America Corp. economists forecast a “mild recession this year” in the US as conditions have deteriorated much more rapidly than they expected.

Investor confidence that policymakers can avoid recession has collapsed. Global growth and profit expectations are at an all-time low while recession expectations are at their highest since the pandemic-fueled slowdown in May 2020, according to Bank of America’s monthly fund manager survey. While labour markets remain strong, central bankers will still need to tread carefully, said Dario Perkins, global macro strategist at TS Lombard.

“We’re on this rapid path to over tightening,” he said. “The worry is that having been embarrassed by inflation, policy makers now want to make amends and the risk is they go too far and cause unnecessary damage to the world economy.”

Some officials are already voicing concerns about the pace of rate hikes. They include Federal Reserve Bank of Kansas City President Esther George, who cautioned this month that rushing to tighten policy could backfire.

The European Central Bank raised its key interest rate by 50 basis points, the first increase in 11 years and the biggest since 2000. That came as the likelihood of a contraction has increased to 45pc from 30pc in June, according to a Bloomberg survey of economists.