This is the clear message delivered by all the major Western central banks lately. On the altar of inflation, growth is ready to be sacrificed.
Since the beginning of the month, an unprecedented sequence has taken place. On September 6, the Reserve Bank of Australia raised rates by 0.5%. It was followed the next day by the Bank of Canada with an increase of 1.25%. On the 9th, it was the European Central Bank (ECB) which announced an increase of 0.75%, imitated on the 21st by the Federal Reserve of the United States (FED). A sequence that ended on the 22nd, with a 0.5% increase in the Bank of England’s key rates. All have put forward the same objective: to fight firmly against the wave of inflation they are going through, without taking into account the negative impact on economic growth. Moreover, they announce unanimously that this is only a stage in the journey towards monetary tightening.
Through this stance, central bankers seek to cool demand, whether it comes from consumption, public or private investment. But this remedy is not without side effects. First of all, it mechanically increases the cost of indebtedness of States with sometimes fragile finances. Then, the tightening weighs directly on the real estate market through the credit channel. Moreover, it invites companies to reassess their investment plan by integrating a higher cost of capital. Finally, this decision places investors in a posture of generalized risk aversion, causing the financial markets to sway. Why buy stocks today if corporate results are potentially becoming weighed down by GDP growth? Why lend to States today if public debts continue to grow and the rates offered tomorrow turn out to be more attractive? Why buy corporate bonds today, if solvency is likely to deteriorate as growth slows down? Faced with all these questions, investors seem very cautious for the moment. Although the treatment inflicted by central banks is painful, it seems a necessary evil in order to hope to avoid the triggering of self-fulfilling effects on inflation. (read more)
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