Why does raising interest rates by central banks have more of a slowing effect on the growth of the economy and a limited anti-inflationary effect?
Have central banks started a race to raise interest rates? The attempt to fight inflation results in a slowdown in economic growth and a depreciation of the national currency. During the SARS-CoV-2 (Covid-19) coronavirus pandemic, some central banks raced to add money and inject as much added money as possible into the economy treated as anti-decessionary, anti-recessionary money for a situation of exceptional economic crisis caused indirectly by the pandemic and more directly by interventionist type measures. The crash in the financial, capital, stock and commodity markets that occurred in March 2020 and triggered a deep recession in many countries was, among other things, the result of a new crisis factor, a new concept, a new term rapidly disseminated by the media and formally established by the World Health Organisation. This new factor was the establishment of the pandemic condition as a new economic crisis factor, which generated a high level of uncertainty. As a consequence of the interventionist measures applied on a record high scale, large amounts of printed money were pumped into the economies of many countries in 2020. In this way, the economies of many countries were thrown out of relative equilibrium and put on a path of rising inflation, which occurred in 2021 and was exacerbated in 2022 by the energy crisis initiated by the war in Ukraine. For smaller economies and less economically developed economies, raising interest rates will lead to deep economic crises. In 2022, on the other hand, many central banks are successively raising interest rates, commercial banks are so far over-liquid, on the other hand credit is becoming more difficult to access, companies are holding back on new investments, wage growth is slowing, rising unemployment is imminent and possibly stagflation in 2023. This puts the economies even more out of balance, as it will be an economic crisis of 2023 that lasts much longer than the Covidian one of 2020 and is more difficult to control with government interventionist measures, as these measures are exhausting themselves in their existing formulas. Is the so-called anti-crisis economic interventionism from the covid trap now falling into the trap of rising interest rates raised by central banks? To date, interventionist measures by central banks have been treated as the 'last resort' of anti-crisis measures. Perhaps indirectly, this issue has also been highlighted by the Nobel Committee, which awarded the 2022 Nobel Prize in Economics precisely for achievements in research on the genesis of emerging banking crises and their resolution by strengthening systemic security solutions for the banking system. But this time, do the hitherto anti-inflationary measures of central banking cease to work when other factors of economic policy, including the mild fiscal policy that activates economic processes, are activated and carried out by the government as part of the so-called policy mix? Should the central bank raise interest rates faster? When applied in parallel with a tightening monetary policy, does an easing fiscal policy result in a limited anti-inflationary effect of raising interest rates by the central bank? Or are commercial banks showing excess liquidity too slow in raising deposit and deposit rates despite the fact that they are raising lending rates? Or are there other reasons for this situation?
In view of the above, I address the following question to the esteemed community of researchers and academics:
Why does raising interest rates by central banks have more of a slowing effect on the growth of the economy and a limited anti-inflationary effect?
What do you think about this topic?
What is your opinion on this subject?
Please respond,
I invite you all to discuss,
Thank you very much,
Warm regards,
Dariusz Prokopowicz
Why does raising interest rates by central banks currently have a weak anti-inflationary effect?
This is possibly because economic agents anticipate the increase in interest rate. They anticipate it by increasing prices early and making cost and investment decisions that counteract the effect of the increase in interest rate, thereby making the actual increase in interest rate of little effect.
Good Morning
Because the Central Bank interdit rate is often stable
First, the increase of the interest rate is very slightly done, and with a lot of estimation about the further effects on the Eurozone economies, bearing in mind that in most of the South EU European countries and even in the big economies the level of sovereign debts is well above than the Maastricht criteria. And perhaps the interest rates increase will have an effect on people with high credits (if they are not in a position to reconstruct) and inflation will continue to boost ahead the prices and create a lot of harm to Small entrepreneurs and ordinary people with a fixed income.
Yes
It depends too on the variationof thé volume of credit from the Central Bank to the economy according to the variation of interest rate and the structure of credit
This question assumes that inflation is moderated by rising interest rates. Nothing could be farther than the truth. Inflation causes interest rates to rise. This is what is called the Fisher effect. Named for Irving Fisher.
We all know the Fisher effect according to monetary conception, and for sure to fight inflation the CB is increasing the interest rate. Do you think that this increase will help to decrease slightly the inflation? Personally, I think that we will leave with inflation after all these years in the past when the accumulated disbalances were resolved by monetary tools.
Iskra,
Imbalances? Yes. You probably have heard that there cannot be negative nominal interest rates, because lenders can always keep their money in their pocket and make zero interest rates. Yet, we all have observed some literally negative nominal interest rates. And some that are so low that they seem like negative rates when you factor in transaction costs. How is this possible? Well, the marginal lender becomes the idiotic public sector who lends to financial institutions at negative rates. Also, small savers are ruined as they are trapped in these extremely low rate savings and checking accounts. Meanwhile, the public sector accounts grow like crazy. Now, it falls to the public sector to resolve these imbalances. You seem confident that there are "monetary tools" available to resolve these imbalances. But problems will remain for a long time.
Peter
Possibly, the reasons for inflation ought to be considered. And if demand side reasons are up to different opinions about the causality with the key rate, the supply side reasons are less disputed to be outside interest rate influence. Yet, in some countries with supply side shocks to blame for the inflation, central banks chose to hike the interest rates depressing already depressed economic agents. These decision makers refer to textbook reasoning and monetary views, believing strongly on own indisputable correctness and supported probably by IFIs.
Hanna Murina absolutely! Here in Latvia, we have seen a sharp decline in supply in the market during the pandemic suppression of the economy, and then a subsequent increase in production costs due to the rise in the price of energy and raw materials caused by the disruption of supply chains due to the war. General inflation exceeded 20%, and for some products 100%. And this dynamic continues. Obviously these processes were not connected with the availability of cheap money. And an increase in Euribor will have little or no effect until the market changes.
- Badges
- Science topic
- Similar topics
- Philosophy
- Esthetics
- Interpretation