RIYADH: While the world is currently experiencing a tightening cycle, economists warn that 13 of the last 16 tightening cycles have resulted in recessions.
Different countries around the world are experiencing different economic problems due to either rising oil prices or supply chain disruptions due to COVID-19 and the ongoing Russian-Ukrainian conflict.
The Egyptian pound fell nearly 14%, Ghana’s central bank announced the biggest interest rate hike in a generation and the Canadian dollar strengthened to its highest level in nearly two months against the greenback.
Thirteen of the last sixteen cycles of tightening have resulted in recessions, and we are in one, said the independent macroeconomic research group Capital Economics in its latest publication.
According to Capital Economics, meetings of the Federal Reserve, Bank of England and European Central Bank showed that the policy tightening plans have not changed.
He predicts that the focus on controlling inflation and secondary impacts on wages and prices could eventually tip the economy into recession.
Since the late 1970s, the US, UK and the future European Central Bank have collectively gone through 16 cycles of tightening in total, “13 of which ended in a recession”.
Capital Economics explains the most likely reason why cycles of tightening are followed by recession right now; that is, “that central banks allow inflation to spiral out of control – then must tighten policy aggressively and drive the economy into recession, in order to bring it back down”.
“The question is, will their actions create a recession anyway? »
The impact of the war on an economy already hit by the pandemic shows that “the path to a soft landing is narrow”.
Devaluation of the Egyptian pound
The Egyptian pound plummets nearly 14% after the war in Ukraine caused the dollar to flee.
The Egyptian pound depreciated nearly 14% on Monday after weeks of pressure on the currency as foreign investors withdrew billions of dollars from Egyptian treasury markets following Russia’s invasion of Ukraine.
The pound fell to 18.17-18.27 against the dollar, according to Refinitiv data, after trading at around 15.7 pounds to the dollar since November 2020.
The central bank also raised overnight interest rates by 100 basis points in a surprise monetary policy meeting.
Egypt is in talks with the International Monetary Fund about possible assistance, people familiar with the negotiations said, but it has not announced any formal request.
“It’s a good move to make as the devaluation of the pound brings it pretty much closer to its fair value and it could pave the way for a new deal with the IMF,” said James Swanston of Capital Economics.
“However, it will be critical that policymakers now allow the pound to float more freely or continue to manage it and allow external imbalances to build up once again, which could lead to future devaluations like today’s.” today in the future.”
The pound’s weakening on Monday could catalyze foreign currency inflows, while investors who already had money in Egyptian treasury bills were unlikely to sell now, said Farouk Soussa, senior economist at Goldman Sachs.
Ghana Interest Rates
Ghana’s central bank announced the biggest interest rate hike in a generation on Monday as it seeks to curb runaway inflation that threatens to create a debt crisis in one of the largest economies in the world. West Africa.
The Bank of Ghana has raised its main lending rate by 250 basis points to 17%, signaling an aggressive stance against soaring commodity prices, from flour to sugar to fuel, and against a depreciating local currency which has shaken investor confidence.
It was the biggest rise in at least 20 years, government records show, more than double the 100 basis point rise predicted by a Reuters poll of 10 economists last week.
The Canadian dollar strengthened to its highest level in nearly two months against its U.S. counterpart on Monday as oil prices climbed and speculators increased their bullish bets on the currency.
The price of oil, one of Canada’s main exports, jumped as EU countries considered joining the United States in a Russian oil embargo and after a weekend attack. end against Saudi oil installations.
U.S. crude prices rose 4.5% to $109.38 a barrel, while the Canadian dollar edged up 0.1% to 1.2590 the greenback, or 79.43 US cents. It touched its highest intraday level since January 26 at 1.2580.
Net long positions in the loonie rose to 17,740 contracts as of March 15, from 7,646 the previous week, data from the U.S. Commodity Futures Trading Commission showed Friday.
Meanwhile, Canadian Pacific Railway, Canada’s second-largest railroad, has shut down operations and locked out workers due to a labor dispute, which will likely disrupt product shipments key staples in an era of soaring prices.
Yields on Canadian government bonds rose on a steeper curve, following the performance of US Treasuries. The 10-year rate hit its highest level since December 2018 at 2.281% before falling to 2.267%, up 7.4 basis points on the day.
Canada has announced plans to issue its first green bond denominated in Canadian dollars this week.
(Contributed by Reuters)