Amidst maximum pessimism, central banks may well engineer a soft economic landing

THE onslaught of poor economic news in 2022 seems unrelenting. Decades-high inflation, exacerbated by war and supply chain issues, has spurred interest rate hikes by global central banks which threaten to further derail economic growth. Based on a compilation by The New York Times in mid-June, at least 45 countries have raised rates in the past 6 months.

Just last week, the Bank of Canada raised its policy rate by 100 basis points (bps). In Asia, the Philippine central bank also raised its overnight deposit and lending rates by 75 bps. With the release of the United States’ inflation report for June – 9.1 per cent, the fastest rise since 1981 – markets are bracing for a hike of 75 to 100 bps in the Federal Reserve’s next meeting this month.

To be sure, central banks around the world pursue a standard playbook to tamp down inflation, using interest rates as their main tool. Higher rates make borrowing more expensive. This would temper business growth and consumer demand, and dampen wage growth, which would eventually show up in more moderate inflation numbers. The impact of higher rates would also be keenly felt in housing markets as mortgage rates rise, which would further crimp consumption.