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