Central bankers around the world are lifting interest rates at an aggressive clip as rapid inflation persists and seeps into a broad array of goods and services, setting the global economy up for a lurch toward more expensive credit, lower stock and bond values and — potentially — a sharp pullback in economic activity.
It’s a moment unlike anything the international community has experienced in decades, as countries around the world try to bring rapid price increases under control before they become a more lasting part of the economy.
Inflation has surged across many advanced and developing economies since early 2021 as strong demand for goods collided with shortages brought on by the pandemic. Central banks spent months hoping that economies would reopen and shipping routes would unclog, easing supply constraints, and that consumer spending would return to normal. That hasn’t happened, and the war in Ukraine has only intensified the situation by disrupting oil and food supplies, pushing prices even higher.
is expected to make its first rate increase since 2011, one that officials have signaled will most likely be only a quarter point but will probably be followed by a larger move in September.
Other central banks have begun moving more aggressively already, with officials from Canada to the Philippines picking up the pace of rate increases in recent weeks amid fears that consumers and investors are beginning to expect steadily higher prices — a shift that could make inflation a more permanent feature of the economic backdrop. Federal Reserve officials have also hastened their response. They lifted borrowing costs in June by the most since 1994 and suggested that an even bigger move is possible, though several in recent days have suggested that speeding up again is not their preferred plan for the upcoming July meeting and that a second three-quarter-point increase is most likely.
As interest rates jump around the world, making money that has been cheap for years more expensive to borrow, they are stoking fears among investors that the global economy could slow sharply — and that some countries could find themselves plunged into painful recessions. Commodity prices, some of which can serve as a barometer of expected consumer demand and global economic health, have dropped as investors grow jittery. International economic officials have warned that the path ahead could prove bumpy as central banks adjust policy and as the war in Ukraine heightens uncertainty.
blog post on Wednesday. Ms. Georgieva argued that central banks need to react to inflation, saying that “acting now will hurt less than acting later.”
rising consumer prices and declining spending, the American economy is showing clear signs of slowing down, fueling concerns about a potential recession. Here are other eight measures signaling trouble ahead:
Consumer confidence. In June, the University of Michigan’s survey of consumer sentiment hit its lowest level in its 70-year history, with nearly half of respondents saying inflation is eroding their standard of living.
The housing market. Demand for real estate has decreased, and construction of new homes is slowing. These trends could continue as interest rates rise, and real estate companies, including Compass and Redfin, have laid off employees in anticipation of a downturn in the housing market.
Copper. A commodity seen by analysts as a measure of sentiment about the global economy — because of its widespread use in buildings, cars and other products — copper is down more than 20 percent since January, hitting a 17-month low on July 1.
Oil. Crude prices are up this year, in part because of supply constraints resulting from Russia’s invasion of Ukraine, but they have recently started to waver as investors worry about growth.
The bond market. Long-term interest rates in government bonds have fallen below short-term rates, an unusual occurrence that traders call a yield-curve inversion. It suggests that bond investors are expecting an economic slowdown.
In recent years, emerging markets have often raised interest rates in anticipation of the Fed’s slow and steady moves to avoid big swings in their currency values, which depend partly on interest rate differences across borders. But this set of rate increases is different: Inflation is running at its fastest pace in decades in many places, and a range of developed-economy central banks, including the European Central Bank, the Swiss National Bank, the Bank of Canada and the Reserve Bank of Australia, are joining — or may join — the Fed in pushing rates quickly higher.
“It’s not something we’ve seen in the last few decades,” said Bruce Kasman, chief economist and head of global economic research at JPMorgan Chase.
The last time so many major nations abruptly raised rates in tandem to fight such rapid inflation was in the 1980s, when the contours of global central banking were different: The 19-country euro currency bloc that the E.C.B. sets policy for did not exist yet, and global financial markets were less developed.
That so many central banks are now facing off against rapid inflation — and trying to control it by slowing their economies — increases the chance for market turmoil as an era of very low rates ends and as nations and companies try to adjust to changing capital flows. Those changing flows can influence whether countries and businesses are able to sell debt and other securities to raise money.
“Financial conditions have tightened due to rising, broad-based inflationary pressures, geopolitical uncertainty brought on by Russia’s war against Ukraine, and a slowdown in global growth,” Janet L. Yellen, the U.S. Treasury secretary, said in speech last week. “Now, portfolio investment is beginning to flow out of emerging markets.”
fastest pace since 1983. In the United Kingdom, it is similarly at a 40-year-high.
kick off rate increases back in December and has been steadily raising rates since. Policymakers are increasingly worried about inflation creating a cost-of-living crisis in Britain and worry that higher rates could compound economic pain. At the same time, they have signaled that they could act more forcefully, taking their cue from their global peers. There is a “willingness — should circumstances require — to adopt a faster pace of tightening,” Huw Pill, the chief economist of the Bank of England, said this month.
Understand Inflation and How It Impacts You
“Many central banks are looking at this as a sort of existential question about getting inflation and inflation expectations down,” said Matthew Luzzetti, chief U.S. economist at Deutsche Bank.
The Fed raised rates by a quarter point in March, half a point in May, and three-quarters of a percentage point in June. While its officials have predicted that they will maintain that pace in July, they have also been clear that an even bigger rate increase is possible.
“Inflation has to be our focus, every meeting and every day,” Christopher Waller, a Fed governor, said during a speech last week. “The spending and pricing decisions people and businesses make every day depend on their expectations of future inflation, which in turn depend on whether they believe the Fed is sufficiently committed to its inflation target.”
The Bank of Canada has already gone for a full percentage point move, surprising investors last week with its largest move since 1998, while warning of more to come.
said in a statement.
of other central banks have made big moves. More action is coming. Central banks around the world have been clear that they expect to keep moving borrowing costs higher into the autumn.
“I wouldn’t say we’re at peak tightening quite yet,” said Brendan McKenna, an economist at Wells Fargo. “We could go even more aggressive from here.”
A key question is what that will mean for the global economy. The World Bank in June projected in a report that global growth would slow sharply this year but remain positive. Still, there is “considerable” risk of a situation in which growth stagnates and inflation remains high, David Malpass, head of the World Bank, wrote.
If inflation does become entrenched, or even show signs of shifting expectations, central banks may have to respond even more aggressively than they are now, intentionally crushing growth.
Mr. Kasman said the open question, when it comes to the Fed, is: “How far have they gone toward the conclusion that they need to kick us in the teeth, here?”
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And if the conflict is prolonged, it could threaten the summer wheat harvest, which flows into bread, pasta and packaged food for vast numbers of people, especially in Europe, North Africa and the Middle East. Food prices have already skyrocketed because of disruptions in the global supply chain, increasing the risk of social unrest in poorer countries.
On Tuesday, the global shipping giant Maersk announced that it would temporarily suspend all shipments to and from Russia by ocean, air and rail, with the exception of food and medicine. Ocean Network Express, Hapag-Lloyd and MSC, the world’s other major ocean carriers, have announced similar suspensions.
“The war just makes the worldwide situation for commodities more dire,” said Christopher F. Graham, a partner at White and Williams.
Jennifer McKeown, the head of global economics service at Capital Economics, said the global economy appeared relatively insulated from the conflict. But she said shortages of materials like palladium and xenon, used in semiconductor and auto production, could add to current difficulties for those industries. Semiconductor shortages have halted production at car plants and other facilities, fueling price increases and weighing on sales.
“That could add to the shortages that we’re already seeing, exacerbate those shortages, and end up causing further damage to global growth,” she said.
International companies are also trying to comply with sweeping financial sanctions and export controls imposed by Europe, the United States and a number of other countries that have clamped down on flows of goods and money in and out of Russia.
In just a few days, Western governments moved to exclude certain Russian banks from using the SWIFT messaging system, limit the Russian central bank’s ability to prop up the ruble, cut off shipments of high-tech goods and freeze the global assets of Russian oligarchs.
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