Rising interest rates are a “dull but dangerous weapon” in the fight against scorching hot inflation, which is hardest to hit low -income households, warns the CEO of one of the largest independent financial, asset management and fintech organizations.
The warning from Nigel Green of the deVere Group came as the average global inflation rate reached 7.4%.
In the US, UK and Germany, inflation has risen at its highest rate in 40 years. Consumer price growth has even begun to jump across Asia, a region that until recently has largely avoided the broad global trend.
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Inflation in Latin America’s largest economy is the highest in 15 years; the total rate in Sub-Saharan Africa is expected to grow to 12.2% this year; the Netherlands this year almost tripled to 9.2%; and Australia doubled to 5.3%.
Nigel Green said: “Inflation is a serious problem in the world. There are real fears of a return to chronic inflation and recessionary landscapes in the 1970s.
Rising Interest is a Dull Weapon
“In an attempt to deal with the scourge of rising prices, central banks around the world are raising interest rates. In theory, when interest rates are higher less money is spent. When less money is spent. money is spent, the slower the rise in prices for consumer goods.
“But raising interest rates is a blunt weapon against this.
“Hiking borrowing costs can only do much to address inflation triggers on the supply side of economies, such as unprecedented backlogs in shipments or shortages of materials and labor, the Covid lockdown in China, and the war in Ukraine. “
He continued: “Raising interest rates to fight inflation is also a dangerous weapon.
“Inflation hits lower- and middle -income families up to a third harder than the richest, according to research, because they have to spend a higher proportion of their income spent on essentials like food and energy. “
Clearly, something needs to be done to protect the poorest families from the worst effects of price increases.
“However, raising interest rates may not be the solution? Why? Because low -income households are more likely to have credit – and higher interest rates mean higher borrowing costs, ”said the CEO of deVere Group.
“In addition, it deliberately slows down the economy which could cause a recession and inhibit the efforts of companies to invest and create jobs that, again, will have a greater negative financial impact on poor families. ” Nigel Green’s conclusion: “The most effective weapon in the fight against inflation is not covered by central banks.
“The best measures depend on getting a certain international grip on the pandemic, stopping the war in Ukraine, solving supply -chain problems, and significantly increasing green energy production – the demand for energy is only set to rise over time and increasing interest. is not enough to soften demand. “
About the deVere Group
The deVere Group is one of the world’s largest independent advisors of specialized global financial solutions to international, locally wealthy, and high -value clients. It has a network of more than 70 offices around the world, more than 80,000 clients and $ 12bn under advice.
Updated on Jun 13, 2022, 10:09 am
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