Hiking interest rates the wrong solution to inflation problem: Analyst
Raising interest rates to tame demand — and therefore inflation — is not the right solution, as high prices have been driven mainly by supply chain shocks, one analyst said.
Global manufacturers and suppliers have been unable to produce and deliver goods to consumers efficiently during Covid lockdowns. And more recently, sanctions imposed on Russia have also curtailed supply, mainly of commodities.
“Supply is very difficult to manage, we are finding across a whole bunch of industries, a whole bunch of businesses, they’re having very different challenges just turning the taps back on,” Paul Gambles, managing partner at advisory firm MBMG Group, told CNBC’s “Street Signs” on Monday.
Referring to the energy crisis that Europe faces as Russia threatens to cut off gas supplies, he said that “on American independence day, this is sort of a co-dependence day where Europe is absolutely shooting itself in the foot, because so much of this has come about as a result of sanctions.”
“And the Fed are the first ones to put up their hands and say monetary policy can’t do anything about supply shock. And then they go and raise interest rates.”
The U.S. Federal Reserve increased its benchmark interest rate by 75 basis points to a range of 1.5%-1.75% in June — the biggest increase since 1994. Fed Chair Jerome Powell (above) flagged there could be another rate hike in July.
Mary F. Calvert | Reuters
Governments around the world have, however, focused on cooling demand as a means of reining in inflation. The lifting of interest rates is intended to put demand more on an even keel with constricted supply.
The U.S. Federal Reserve, for example, increased its benchmark interest rate by 75 basis points to a range of 1.5%-1.75% in June — the biggest increase since 1994 — with Chair Jerome Powell flagging there could be another rate hike in July.
The Reserve Bank of Australia is set to raise rates again on Tuesday, and other Asia-Pacific economies like the Philippines, Singapore and Malaysia have all jumped on the same rate hike bandwagon.
The Fed said in a statement it opted to raise rates as “overall economic activity” appeared to have picked up in the first quarter of the year, with rising inflation reflecting “supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures.”
Monetary policy the ‘wrong solution’
Gambles said demand is still below the level it was at before the pandemic started, but would’ve fallen short even without the roadblocks of Covid.
“If we look at where employment would have been in the States, if we hadn’t had Covid, and we hadn’t had the lockdowns, we’re still about 10 million jobs short of where we would be. So there’s, there’s actually quite a lot of potential slack in the labor market. Somehow that’s not translating to the actual slack,” he said.
“And, again, I don’t think that’s a monetary policy issue. I don’t think monetary policy would make a great deal of difference to that.”
With supply shocks rearing their ugly heads from time to time, it would be hard for central banks to maintain a sustained grip over inflation, Gambles added.
Gambles argued that the United States should…
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