Topic 2: WORLD ORDER OF RATE HIKES

As prices soar, the major world economies are trying to find a way to tackle them. Across the world the people feel the brunt of hefty prices for the things they buy every day. Covid has disturbed the world economies and now the policy makers are struggling to balance out its effects. The uncertainty to curb the inflation could result in destabilize the period of spiralling prices. Higher inflation would squeeze the people and businesses making future unpredictable for them. Too aggressive approach of policy makers could lead to crumpling global economy. This could lead to the major recession, shutting down businesses and increasing unemployment. So, the policymakers are taking precautionary steps to bring down the inflation across the world. Few leaders of major central banks in North America, Europe and others have recently stated that they would continue raising the rates as inflation is moderate and remain well above their target rates that is 2%. U.S. Federal Reserve have raised their policy rate to just above 5% from near zero in March 2022, and they forecast raising it two more times in 2023, to just above 5.5%. Policymakers at the European Central Bank, which sets policy for the 20 countries that use the euro, also expect to continue raising rates, which have reached the highest level since 2001. The Bank of England recently surprised investors by raising rates more than expected with its 13th consecutive increase. In a recent report, its stated that quite a few Asian countries are expected to cut interest rates ahead of the US Fed, starting in the end of 2023

to support demand recoveries into 2024. Despite a 500-bps rate hike by the US Fed from March 2022, much of the US economy has remained strong. The recent report by Asian research company, stated that the growth is supported by government spending on new industry programs and strong growth in decarbonisation industries. As a result, core inflation in May of 5.3% on-year is now above headline inflation (4.1%). Further, it stated that going by historical evidence, unless the US Fed pushes core inflation down towards 2 per cent by rate hikes, inflation may well spiral up. For Europe the region is not as buoyant as the US and is doing better than expected, while maintaining that the European Central Bank (ECB) will persist with rate hikes in H2 2023 before switching to a string of rate cuts in 2024, possibly ahead of the US Fed. Since the ECB’s team expects GDP growth to slow to 0.9% this year (from 3.5% in 2022) followed by a lift to 1.5% in 2024 while inflation slows from 5.4% to 3.0%. The report has lifted its 2023 GDP forecast for India to 5.8% from 5.4% while nudging 2024 to 6.2% from 6%. It said that the inflation and interest rate headwinds should ease into 2024 with increase in consumer demands and manufacturing growth. In the month of June ‘23, world's major central banks delivered the biggest number of monthly interest rate hikes, surprising markets and flagging more tightening ahead as policy makers struggle to fight the inflation. According to the Reuters data, seven out of the nine central banks with 10 most heavily traded currencies done rate hike in June while two opted for no change.