Central banks risk a global recession by raising interest rates in a bid to contain soaring energy costs, an analyst has said.
Julian Howard, chief multi-asset investment strategist at GAM Investments, warned that rate-setters are now “on the verge of policy mistake territory” as expectations of rate rises grow.
Howard said that the traditional response to rising energy costs — ramping up borrowing costs — is an error given the supply-side nature of the energy price shock.
“The kind of interest rates that are needed to actually stop people filling up their car, to stop people flying, would be seriously high, very, very high — and recession-inducing,” Howard said.
The European Central Bank held interest rates steady last week, despite eurozone inflation coming in at 3% in April. The Bank of England also left rates unchanged as the U.K. grapples with higher oil prices.
But investors are now pricing a June ECB rate hike, while BoE governor Andrew Bailey told CNBC that a protracted energy price shock could force the bank’s hand on borrowing costs.
The Reserve Bank of Australia has already moved, increasing rates by 25 basis points to 4.35% on Tuesday, after higher fuel prices pushed headline inflation in the country to 4.6% in March, from 3.7% the previous month. Other global monetary authorities could also follow suit.
But speaking with CNBC’s “Squawk Box Europe” on Tuesday, Howard recalled the expression “Central banks can’t print molecules of oil.”
“The immediate emergency in the eyes of the central banks is is the actual cost of energy,” Howard said.
Brent crude.
While rate rises can help combat the second-round effects of inflation, such as wage demands, it would be a mistake for policymakers to try to tackle energy costs by increasing borrowing costs in the first instance, he added.
“What tends to happen is that actually inflation doesn’t go up as much as people think, because spending on non-energy actually goes down,” he said.
He pointed to the aftermath of the Ukraine war, which saw U.S. services inflation relatively muted as consumers cut back on certain items to create room in their budgets for energy costs. “So the effect is never quite as pronounced as we think,” he added.
For the Federal Reserve, “anything is possible over the next six months,” Viktor Shvets, head of global desk strategy at Macquarie Capital, said.
U.S. inflation will likely hit 4%, potentially moving higher, as the country contends with a “mild version” of stagflation, Shvets said.
He told CNBC’s “Squawk Box Asia” on Tuesday that the probability of monetary tightening heading towards the end of this year and into 2027 is “actually quite real.”
