Global equity markets have been on a roller-coaster ride this week, as the market appears to be waking up to what we have been arguing ad-nauseum about for months: that significantly higher interest rates won’t bring down inflation but will hurt economic growth.
This is because the current high inflation is not a result of excess demand. It is a result of supply-chain disruptions and the war in Ukraine; and while we accept inflation will hang around for the rest of the year, it is likely to fall during 2023 on its own volition without the need for central banks to aggressively increase interest rates, due to what is known as ‘base effect’ – as the price increases we are experiencing this year will fall out of the next reading’s calculations.
Consequently, significantly higher interest rates across the world won’t be good for the global economy, as the sharp jump in energy costs and elevated food prices are already constraining our disposable income – not to mention April’s tax increase. And as we have previously explained, higher interest rates won’t make oil come out of the ground any faster, or harvest more crops.
Additionally, given the fact that the consumer accounts for around 60% of the UK economy, and two-thirds of the US economy, higher interest rates will only further reduce our consumption and thus slow the global economy (or worse, put it into reverse), as higher interest rates means higher debt repayments.