Interest rate rises could push US and Europe into ‘potential’ recession

Martin Lewis discusses interest rates

The US still has the “potential” to fall into a serious recession due to high interest rates, according to experts.

Central banks, including the Federal Reserve and the Bank of England, have hiked rates multiple times over the last year.

This has been done to mitigate the damage caused by soaring inflation on the economy following the pandemic.

Despite inflation showing signs of easing, analysts are concerned rising interest rates could trigger an economic downturn.

A recession is defined as taking place when a country’s economy experiences two consecutive quarters of negative growth.

While the US has so far avoided this fate, other major economies such as Germany have fallen into recession.

Last month, the Federal Reserve made the decision to pause its wave of interest rate hikes at least for the time being.

The Fed’s chair Jerome Powell has signalled the central bank would raise rates once more if it deemed it necessary.

In the foreseeable future, experts believe the public should expect interest rates to remain high for the time being.

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Carsten Brzeski, ING’s Global Head of Macro and Chief Economist, shared the impact of hiked rates has still to be felt.

He explained: “It takes a while before higher policy interest rates find their way into the real economy. Some central bankers have openly discussed that this time around, the transmission of monetary policy is faster and stronger than in the past.

“This, however, does not diminish the evidence that longer-term interest rates have an even stronger impact on the economy than policy interest rates.

“According to standard models, at least in the eurozone, an increase in longer-term interest rates has a four times stronger impact on growth than a similar-sized policy rate hike.

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Despite this, the economist highlighted further interest rate rises could inadvertently trigger a recession.

Mr Brzeski added: “In our base case scenario, it is still a ‘high’ and not ‘higher’ for longer, as we expect at least the Fed and the European Central Bank to have already reached peak policy rates.

“However, just judging from official comments, the risk of further additional rate hikes remains high. The increase in longer-term interest rates has the potential to push both the US and the eurozone economies not only into recession but also to break something somewhere.

“The irony of such a scenario would be that the more financial markets believe in ‘high for longer’, the higher the chances are that central banks will actually cut rates. It’s a very inconvenient truth for central bankers.”

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