Raising rates to fight inflation, the bad remedy believes an economist
Economist and Nobel laureate in economics, Joseph Stiglitz, believes that rate hikes by central banks are akin to “bleeding” that will only not to curb inflation (Archives).
In the United States, the United Kingdom, the euro zone, but also in most emerging economies, key rate hikes follow one another at a frantic pace in order to slow inflation. But critics point to the risk of stifling growth in this way.
It reminds me of what happened with bloodletting, said Nobel Prize in Economics Joseph Stiglitz in an interview with AFP, referring to the practice since antiquity of to make a patient bleed to cure him.
“When a patient is bled, generally he does not did not heal except by miracle. So they bled him even more, and his health got even worse. I fear central bankers are doing the same right now. »
— Joseph Stiglitz, Nobel Laureate in Economics
This week again, the American, British and European central banks should unsurprisingly continue their tightening. The Fed could thus raise its rates on Wednesday by 0.75 point, or even a whole percentage point, after already four increases since March.
Those of South Africa , Brazil and Sweden should also sound resolute in tackling inflation.
The objective is to increase the cost of credit granted to households and businesses, to slow down the job market, wage increases, and ultimately the rise in prices.
But after six months of war in Ukraine and the devastating consequences for parts of the world, some worry about the consequences of such restrictive and synchronized policies.
Did the economy really need this to put the brakes on? asks Eric Dor, Director of Economic Studies at the IESEG business school.
According to him, inflation itself created the drop in activity, households lose purchasing power, wage increases are lower than inflation, and represent a brake on consumption, particularly for Europe, where rate hikes risk further weakening the economy.
Will it cause a little loss of growth? It is possible, the boss of the European Central Bank (ECB) Christine Lagarde acknowledged on Friday during a conference in Paris. But for her, it's a risk that we must take by having measured it well.
The priority is to curb rising prices, also said Joe Biden's Treasury Secretary, Janet Yellen, while acknowledging a risk of recession in the United States. The specter of inflation in the 1970s and 1980s is never far from people's minds, when prices had soared for nearly a decade.
The World Bank for its part estimated Thursday that the simultaneous rise in interest rates increases the risk of a global recession next year, and especially in emerging and developing countries, while calling on banks central governments to continue their efforts to reduce inflation.
In addition to the power of the remedy adopted and its side effects, the debate also focuses on the causes of the evil.
According to Joseph Stiglitz, the inflationary outbreak is less caused by excess demand than energy and food price hikes and continued blockages in supply chains. Phenomena against which central bankers have a much smaller field of action.
They are using a remedy stemming from a misdiagnosis, hammers the economist, warning that we could see in the United States the prices of rents continue to soar under the effect of the rise in rates , and therefore inflation will persist.
“The risk is that, without having any real impact on inflation, this policy worsens the cost in terms of activity and employment. »
— Eric Dor, Director of Economic Studies at IESEG Business School
Stricter monetary policy will inevitably have economic costs, acknowledged for his part in July the chief economist of the International Monetary Fund (IMF) Pierre-Olivier Gourinchas, specifying that any delay will only exacerbate them.
Given the limits of monetary policies, the latter had advocated targeted budgetary support from governments, a solution on which a consensus is emerging throughout the world despite its high cost on already severely degraded public finances.