In less than three years, the situation of the world economy has changed remarkably.
At the beginning of the fourth quarter of 2019, weak growth was widespread among advanced economies. Due to the 2008 crisis, the macroeconomy did not reach stabilization and in the United States, European Union, United Kingdom and Japan, central banks kept reference interest rates low, close to zero, and in some countries they were negative. .
In addition, programs were implemented to inject resources into financial systems, the purchase of debt securities, and the so-called quantitative easing (QE) of central banks had a notable dimension.
Thus, the easing of monetary policy included the so-called QE.
With the Covid pandemic and the drastic fall in equity and bond markets in major advanced economies, QE deepened while interest rates remained low.
In emerging market economies, specific versions of QE were implemented, and currency exchange operations were carried out between the main central banks, mainly dollars, for those of different countries, to maintain monetary stability.
The thesis defended in the main academic circles and in international financial organizations, that monetary policy is what makes it possible to achieve stability and recover growth. was not only maintained, but deepened to the extreme.
The use of fiscal policy was punctual and mainly to support or support the consumption of groups of the population or business segments, to mitigate the reduction in income, and thus the idea of considering fiscal balance as a key variable was maintained.
In 2020, equity markets recovered and several of the major indices, such as the S&P 500, the Dow Jones 30 or the Nasdaq 100, reached historic levels. Debt markets also recovered.
In mid-2020, the IMF noted that the action of central banks produced positive results, such that, in economies with financial sectors of systemic importance, equity markets overlapped.
In 2021, the advance in equity markets continued, and until just a few weeks ago Dow Jones, Nasdaq and S&P continued to report record highs. In the economy as a whole, there is no similar situation. At the end of 2021, the continued recovery of the world economy was not yet reached.
However, new problems emerged as a result of the pandemic, such as difficulties in some value chains; delays in the transport of goods, with saturation of maritime routes; notable differences in the recovery of some economic activities; and the lack of some important inputs for certain products.
In this context, inflationary problems reappeared, and in a relatively short period, consumer price indices in the main developed economies rose to levels not seen for several five years.
Further complicating the situation was Russia’s invasion of Ukraine, triggering a war with an indefinite scope and with an immediate negative impact on energy prices and some basic grains.
Recent data on the military conflict indicate that it may continue as the US government and the rest of NATO members seek to defeat Russia by applying economic sanctions and arming the Ukrainian government.
Oil, gas, corn and wheat were quoted on futures markets with great instability and an upward trend, as Russia and Ukraine are producers of global importance. Inflation, therefore, was further boosted by the war.
However, the reaction of the international financial institutions, of several of the most important central banks and ministries of Finance or Finance of some advanced economies is totally conventional: more monetary policy. Recourse to a permanent increase in the reference interest rate is required.
The Fed (US central bank) began on March 16 a cycle of hikes in short-term interest rates, with an increase of 25 basis points.
Weeks later, on May 4, claiming it was a move to restore price stability, the Fed raised interest rates by half a point and indicated that similar increases are on the table for upcoming meetings.
In Mexico and Brazil, considering the remarkable vulnerability of their financial markets and the difficulty of maintaining capital in the country that hold federal government and corporate debt securities, both central banks have been making some higher rate hikes for months. of reference.
In Mexico, in November 2021, the rate was set at 5%, and in March 2022 it had been increased by 150 basis points to 6.5%.
In Brazil, it was increased by 150 basis points in December 2021. In March, another increase was made, and at the time the Fed raised rates, the Brazilian Central Bank raised its interest rate by one point percentage, until reaching 12.75%.
Interest rate increases continue to add to the argument of fighting inflation, but no positive results are observed and, on the contrary, there is a decrease in growth expectations.
Rising interest rates inhibit economic activity, which is bad news when investment is doing so poorly, particularly in countries like Mexico and Brazil.
Translation of Giulia Gaspa
