A global financial crash is on the cards if interest rates continue to rise, an expert has said. It comes as the Bank of England is warned another interest rate hike will tip the UK into recession. Experts have lined up to advise the Bank not to raise the current rate of 4.25 percent over fears it will have a further chilling effect on business investment and push already struggling households over the edge.
Central banks around the world have been fighting rising inflation for more than a year now by slowly increasing their benchmark policy rates.
It came as the impact of China’s zero-Covid policy on supply chains and Russia’s war on Ukraine sent inflation soaring with energy prices rocketing and the flow of goods slowing.
The Bank of England (BoE) is due to announce any further change to its Bank Rate on May 11. The US Federal Reserve is to make its own rates decision on May 2 with the European Central Bank confirming its rate two days later.
Dr George Hulene, Finance Associate Professor at Coventry University’s Faculty of Business and Law, told Express.co.uk there is a high risk hiking Britain’s interest rate will slow down business investment even further.
He said: “We have seen evidence since around last November that businesses and corporations significantly slowed down investments because of the high-interest rate and if this continues for much longer, we risk economic output not showing improvements this year which could lead to a recession.
“Data shows clearly that as a country we sit on a very narrow fence between a recession and very small economic growth.”
Although it has sidestepped recession so far, Britain’s economy has stagnated over the last year.
Professor Emilios Avgouleas, International Banking Law and Finance Chair at the University of Edinburgh, told Express.co.uk if central banks increase interest rates, a global recession is on the cards.
He added: “The outlook for Western economies is very bleak. If interest rates continue to rise, a recession is just around the corner. If Western consumers are not spending, then there is a global recession because exporting countries won’t have anywhere to sell their products.”
It comes after the IMF warned the global economy is facing a “perilous” period, in its most recent forecast.
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Asked if there could be a global recession if rates go any higher, Dr Hulene said: “I am not too convinced it will be global like the 2008 one, though some countries such as the US, Spain, Germany, some in Asia, seem to have dealt with inflation quite well and they are now on quite a strong recovery journey.”
Dr Nikolaos Papanikolaou, Senior Lecturer in Finance at Newcastle University Business School, told Express.co.uk higher rates have led to large losses in banks’ securities portfolios, triggering recent banking turmoil and posing a threat to financial stability.
He cautioned: “While the probabilities of an economic recession are now higher, the depth of a likely recession is expected to be modest.”
Dr Hulene advised the Bank of England’s rate-setters not to change the UK’s interest rate, saying in his view they should keep them as they are.
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He added: “The inflation levels we see at the moment are quite clearly not happening because people and businesses spend erratically so there is no genuine need for the bank to extract cash from society.
“The inflation we experience now can only be addressed as a joint effort between the Government and BoE and raising rates further will not help. We have seen evidence of this over the last ten-eleven months.”
He added that, given the slowdown the UK is seeing in corporate borrowing, he believed Britain is already seeing a significant negative impact of higher rates on the economy.
Dr Hulene said: “For the general population, we can see the housing market slowing down to almost a standstill and for businesses we can see they really struggle to borrow, which has a massive impact on their ability to invest in further developing their processes, supply chain and their overall resilience.
“Unfortunately, with the Government doing very little to genuinely help the economy grow, we needed businesses and corporations to do their bit, but the high rates are clearly not helpful.
“Ideally, with the BoE having done so much on the interest rates side, it is now the job of the Government to help generate real macroeconomic output and to address all the supply chain problems we experience as a country.”
Dr Papanikolaou said: “Policymakers cannot simply turn a blind eye to the current financial turmoil in the next BoE rate-setting meeting and continue to fire away rate hikes adding more tension to banks and markets. It is the proper time for [the] BoE to hold off on any further increase in its benchmark rate and focus on supporting the financial system to stabilise. This is expected to prevent a broader banking crisis and enhance investor confidence in financial markets.
“Interest rates in [the] UK have not yet reached a peak, but are getting close. The stubbornly high inflation implies that the BoE may have to raise its rate in the near future in a further effort to bring inflation down to its 2 percent target level notwithstanding the current financial turmoil. However, any aggressive rate hikes that can put additional stress to the UK economy and threaten financial stability are not likely to take place within the coming months.”
Professor Costas Milas, from the University of Liverpool’s School of Management, told Express.co.uk central Banks are “damned if they do and damned if they don’t”.
He explained: “This is because higher interest rates depress economic activity and lower (eventually) inflation, but, at the same time, high inflation, on its own, adds to the cost of living crisis, squeezes incomes and depressed economic activity.”
He added Wednesday’s inflation reading will set the tone for the BoE’s next interest rate decision.
Professor Milas said: “Any reading above (or equal to) 10 percent will signal inflation stubbornness and will force the Bank’s policymakers to hike again. I believe they should not hike for two simple reasons. First, money circulated in the economy is dropping fast, according to BoE data. This will put downward pressure on inflation if not in March, [then] definitely in April. Second, supply chain pressures are also easing fast. This should also put downward pressure on inflation.”
He said it takes up to two years for an interest rate hike to combat inflation, adding: “The Bank has raised its Bank Rate from 0.1 per cent in late 2021 to 4.25 per cent currently.
“The full depressing impact of these hikes on inflation has not materialised yet. The Bank needs to be patient not least because raising interest rates in periods of rising (or elevated) financial stress might do more harm than good.”
Professor Milas added: “There is speculation the Chancellor of the Exchequer [Jeremy Hunt], under advice from the BoE, will increase the level for guaranteed UK deposit, from £85,000 currently.
“This is telling me that UK regulators are somewhat worried we have not fully escaped the risk of a financial/banking crisis, initiated in March via the Silicon Valley Bank and Credit Suisse events.
“In the current circumstances, better to avoid further interest rate increases that will put more pressure on the UK economy.”
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