When, in a situation of high inflation, the number of companies and enterprises going bankrupt is increasing, the level of real income of economic entities and citizens is decreasing, the scale of investments is decreasing, the level of consumption is decreasing, the deconstruction of the economy is deepening, which is additionally reflected in the occurrence of cases of loss of financial liquidity and bankruptcy of banks, and the risk of stagflation is increasing, in such a situation should central banks continue to increase interest rates, treating the fight against inflation as a priority for monetary policy?
When a new risk factor emerges that threatens the efficient development of the economy, it can cause serious perturbations on financial markets, including capital markets. When the WHO declared a pandemic on 11 March 2020, uncertainty prevailed on the capital markets, with a strong stock market crash. The heavy discounting and panic selling of shares was only halted by significant, interventionist interest rate cuts by central banks, and this despite the low interest rates already in place at the time. Additional interest rate cuts were possible because inflation was low in many countries in 2020. Subsequently, lockdowns imposed on selected sectors of the economy and temporary national quarantines were introduced in some countries to slow down the transmission of the coronavirus. In order to limit the economic crisis and increase unemployment, governments introduced new anti-crisis programmes called, for example, Anti-Crisis Shields consisting of subsidies to workers' salaries, subsidies to companies, refinancing of fixed costs, temporary tax cuts, etc. In this way, additional funds were injected into the economy. In this way, large amounts of additional money were injected into the economy. The now familiar mechanism of interventionist, anti-crisis measures, which had previously been applied in the USA during the 2008 global financial crisis to commercial and investment banks and some companies in the non-financial sectors, was applied. In this way, a huge amount of additional money was injected into the economy. When, thanks to the coronavirus vaccines, the state of uncertainty in the financial markets and in the economy was significantly reduced in 2021, economies were rapidly recovering from the pandemic recession of the 2020 economy. From 2021 onwards, commodity prices and other categories of inputs began to rise. Consumption and inflation were also rising. In 2022, some central banks embarking on a plan to curb the scale of rising inflation began to raise interest rates, a process that continued until the first quarter of 2023, as inflation levels in many countries had already been in double digits for several months and continued to rise. The increase in interest rates by central banks resulted in an increase in the cost of borrowed money, bank loan instalments increased, and the availability of credit decreased. commercial banks, perceiving symptoms of the risk of another economic crisis looming on the horizon, tightened their credit policies, further restricting access to credit. The level of investment already started to decline from around mid-2022. Earlier, as economic growth started to decline as early as the beginning of 2022. In the second half of 2022, the beginning of a decline in citizens' real incomes was already noticeable in some countries, despite wage increases. This resulted in a decline in consumption levels, which deepened in the first half of 2023. From March 2023, inflation began to fall in some countries and the decline in economic growth reached its minimum. This seemed to be the beginning of the end of a weak economy exacerbated by the 2022 energy crisis. However, all of a sudden, in March 2023, financial institutions start to fail. In mid-March 2023, the sizable US banks Silicon Valey Bank and Signature Bank, which had been investing in securities as part of investment banking, go bankrupt. Paradoxically, they lost liquidity by investing in securities classified as those generating low investment risk, i.e. government bonds. But even these widely regarded as the safest financial instruments in a situation of misguided investment banking policy can lead to a serious crisis, insolvency and, consequently, bank failure. In such a situation, central banks find themselves at a kind of crossroads in terms of deciding whether to continue tightening monetary policy by continuing to raise interest rates or to change their strategy from hawkish to dovish, i.e. to a more benign one by ending interest rate hikes despite still elevated inflation. The decision on the aforementioned change of strategy could be interpreted by financial market participants as the start of a period of monetary easing. This would probably also have an impact on developments in financial markets. Therefore, the key issue is to decide what could deepen the economic downturn and cause more negative economic effects, i.e. the continuation of interest rate increases, which could increase the scale of bankruptcies of economic entities, or the end of interest rate hikes, which would slow down and prolong the rate of inflation decrease in subsequent quarters and possibly years.
In view of the above, I address the following question to the esteemed community of scientists and researchers:
When, in a situation of high inflation, the number of companies and enterprises declaring bankruptcy increases, the level of real income of economic entities and citizens decreases, the scale of investments decreases, the level of consumption decreases, the deconstruction of the economy deepens, an additional symptom of which are cases of loss of financial liquidity and bankruptcy of banks, the risk of stagflation increases, in such a situation should central banks continue to raise interest rates, treating the fight against inflation as a priority of monetary policy?
And what is your opinion on this?
What is your opinion on this subject?
Please respond,
I invite you all to discuss,
Thank you very much,
Best wishes,
Dariusz Prokopowicz
Central banks cut interest rates when the economy slows down in order to reinvigorate economic activity and growth. Rates go up when the economy is hot. The goal of cutting rates is to reduce the cost of borrowing so that people and companies are more willing to invest and spend.
When the economy is growing at a rate that may lead to hyperinflation, the central bank may increase interest rates. When member banks cannot borrow from the central bank at an interest rate that is cost-effective, lending to the consuming public may be tightened until interest rates are reduced again.
The result — steadily more expensive loans — can force more companies to cancel new ventures and cut jobs and consumers to reduce spending. It all adds up to a recipe for recession, dear Dariusz Prokopowicz
Higher interest rates can lead to even higher inflation, which is when the prices of goods, services, and interest rates rise. The economy will slow down, because people have less money to spend. A moderate=no to your query, dear Dariusz Prokopowicz
Tricky situation. Inflation benefits the borrower - it repudiates debt. This is principally the US government. It is, therefore, a way to pay for the overseas adventures (US troops on foreign lands and seas) which have gone from promoting globalization (healthy) to supporting other countries costly social programs (NOT healthy). In the early days it tends toward more employment at lower real wages ( old Keynesian model). This then may be a correction to the social programs cost since JFK. But when businesses begin to factor inflation into their planning, stagflation happens.
It really is "threading the needle" .
"inflation is back; to fight it central banks must change their approach", It is not working, because the rise in interest rates is causing low economic growth by making the cost of money more expensive.
During the Pandemic Covid 19 period, Government spending rose sharply in most countries, was a form of support i sent directly to households.
Just now, There is financial stability, but not price stability.
https://www.imf.org/en/Blogs/Articles/2022/08/01/blog-soaring-inflation-puts-central-banks-on-a-difficult-journey-080122
https://www.imf.org/en/Blogs/Articles/2022/08/01/blog-soaring-inflation-puts-central-banks-on-a-difficult-journey-080122
in a short time, high interest rates have a positive impact on the profitability of commercial banks, but in a medium period it has a negative impact because it increases the cost of money and and many companies decrease their demand for credits. It is important to take into account that one of the main functions of the banks is to lend money and if the demand for credit decreases, it directly affects the financial situation of the banks. they are left in a very vulnerable situation. In many cases, government has to intervene (Financial Bailouts.
الاستمرار في رفع سعر الفائدة سوف يزيد من تكلفة الاستثمار لدى العديد من الشركات ويخفض عدد الشركات المساهمة في الاستثمار مماينعكس على ارتفاع اسعار السلع والخدمات في السوق وبالتالي ينعكس سلباً على الاقتصاد عامة والمستهلك خاصة لذا فأن خفض معدلات سعر الفائدة يساعد في تنشيط الاستثمار وينعكس بشكل ايجابي على السوق
Hello Aseel
Monetary policy, has a key role to stop inflation. "it generally boils down to adjusting the supply of money in the economy to achieve some combination of inflation and output stabilization". Most economists agree that reduce money supply would decrease price, The negative effect is that this policy directly affects production, because the cost of money increases.
Monetary policy is a countercyclical tool of choice.
Best regards
- Badges
- Science topic
- Similar topics
- Correction