Central banks in both the Eurozone and Britain must continue to raise interest rates to stave off so-called stagnation, the combination of a stagnant economy and high inflation.
According to Bloomberg, this was said by American economist Nouriel Roubini, who is known for his pessimistic forecasts.
Roubini believes that the current rise in oil prices on world markets will keep inflation high and that any speculation about easing monetary policy is premature.
According to him, both the European Central Bank and the Bank of England are in a more difficult situation than the American central bank, because prices in Europe are still on the rise, while economic growth is slowing down.
The Fed is at an advantage
Increasing borrowing costs usually helps to reduce inflation, but at the same time has negative effects on economic growth. “This presents a dilemma for both the ECB and the Bank of England,” Roubini said. According to him, the United States is in a better situation thanks to favorable economic data, which indicate that the American economy is not in for a so-called hard landing.
However, the economist warned the financial markets that it is a mistake to expect a reduction in interest rates in the US already at the beginning of next year. On the contrary, he did not rule out that the Fed will have to raise interest rates even more. According to him, the first reduction in interest rates in the US could occur roughly in the middle of next year.
The Fed is widely expected to keep the key interest rate in a range of 5.25 to 5.50 percent this week. “They can’t say they’re done. Inflation is increasing, oil prices are increasing, there is room for further increases (in interest rates),” Roubini said.
Normally it will be three to four percent
According to him, inflation will be pushed up, among other things, by structural changes in the world economy, for example the aging of the population. Roubini therefore expects that central banks will eventually have to raise their inflation targets from two to three to four percent.
“There are factors on both the supply and demand side that suggest that two percent inflation is a mission impossible. The new normal for developed economies will eventually be between three and four percent,” he said.
The ECB started raising interest rates last July. At that time, it raised the base rate to 0.50 percent from a record low of zero percent, at which it has been kept since 2016. Last week, the ECB increased the base rate by a quarter of a percentage point to 4.50 percent, raising interest rates for the tenth time in a row. However, she indicated that this increase could be the last.
He predicts a drop in US stock prices
The Bank of England last raised its key interest rate in early August, by a quarter of a percentage point to 5.25 percent. Thus, it increased interest rates for the fourteenth time in a row. They are expected to raise rates by another quarter of a percentage point this week, to 5.50 percent.
According to Roubini, she should increase the base rate up to 5.75 percent.
Roubini had already earned the nickname Dr. Doom (Doctor of Doom). For example, he predicted the collapse of the American real estate market in 2007 and 2008, which was followed by the global financial crisis.
Roubini recommended betting on a decline in US stock prices for the rest of this year. He warned that US stocks could fall by ten percent given the state of the world economy, and that stock markets in other countries could do even worse. He also stated that investors are too optimistic about the situation in the credit and bond markets.
Central banks are on top of interest rates; inflation plays its game anyway