The United Nations has warned central banks against further interest rate rises, saying more monetary tightening will increase inflation.
In a report released on Monday (October 3), the United Nations Conference on Trade and Development (UNCTAD) said the increase in interest rates, undertaken by many central banks to combat soaring inflation, poses an “additional risk” to the economy.
The UNCTAD said the increasingly global nature of “financial entanglements” since the global financial crisis means that “complex unanticipated shocks”, including extreme price volatility and outbreaks of financial panic are a present danger.
“Given the high leverage of non-financial businesses, rising borrowing costs could cause a steep increase in non-performing loans and trigger a cascade of bankruptcies,” it said.
The circumstances in which inflation is rising, mainly fragmented supply chains, will not be impacted by higher interest rates, but will just reaffirm inflation expectations by further reducing demand.
“This would only help precipitate a sharper global recession,” it said.
In the case of the Federal Reserve, the report added, the impact of a rate tightening cycle would have a knock-on impact on “vulnerable” emerging economies, which have high public and private debt.
Interest rate rises tend to push the denominated currency into a stronger position, as investors increase their allocations to the country to take advantage of the higher rates.
Emerging markets have a high exposure to fluctuations in the dollar as they are reliant on American imports of goods including food and fuel.
Central banks have been raising interest rates in recent months in an attempt to curb high inflation, which hit 9.9 per cent in the 12 months to August this year in the UK, according to the Office for National Statistics.
Bank of America has predicted that the central bank will hike rates by 50 basis points at each meeting until the end of the year, and raise rates thrice by 25 basis points in 2023, to take the base rate of interest to 4 per cent.
The bank’s research team upgraded its base rate ceiling prediction, which was previously 3.25 per cent, as a result of the tax cuts and increase in defence spending expected by Liz Truss’s new government.
The Federal Reserve is signalling that it will also continue to hike rates, with one official backing a fourth consecutive 0.75 percentage point rate rise at the next meeting in November.
sally.hickey@ft.com
