Editorial. Throttling growth

Given the grim prognosis on global growth for this year and the next, many expected the US Federal Reserve to announce a slowing of the pace of its monetary tightening in the latest FOMC meeting on November 2. But not only did the Fed increase the Funds rate by another 75 basis points, it has also made it abundantly clear that moving inflation back towards the long-term target of 2 per cent remains the overarching objective of its monetary policy and that it will ‘stay the course, until the job is done’. With the PCE inflation for the 12 months ending September at 6.2 per cent and the core PCE, excluding food and energy, at 5.1 per cent, the Fed’s stance could mean that the rate hike cycle could prolong for some time. The Bank of England too increased its policy rate by 75 basis points as the country battled decadal high inflation. Such continued aggressive stance of the Fed and central banks of advanced economies could severely impact global growth. The US may not like to see a repeat of the deep recession that followed the Volcker years, post the second oil shock.

The Fed has decided to maintain a “restrictive policy stance” until price stability is achieved, despite increasing evidence that the US economy is slowing. The cumulative increase of 375 basis points in Fed’s policy rates since this March has resulted in real GDP remaining unchanged so far this year. Consumer spending has slowed compared to last year due to lower real disposable income and tight liquidity conditions. Rising interest rates are impacting the housing sector as well as fixed investments of businesses. While the US job market conditions are strong and the country is expected to weather this crisis, growth in other countries may not prove this resilient. For instance, Bank of England’s monetary policy committee expects UK’s GDP to decline throughout 2023 and in the first half of 2024 with high energy prices and tight financial conditions impacting spending. The World Bank warned in September that the synchronised rate hikes across countries could compound the tightening of financial conditions and worsen the global slowdown. The report had also warned that such synchronised tightening could hurt emerging market and developing economies more.

The rupee has been under great pressure, losing 10 per cent against the dollar since the beginning of this calendar as the spiking sovereign bond yields in the US and EU resulted in portfolio investors withdrawing funds out of Indian equities and bonds. While the rupee has been relatively resilient when compared with other EM currencies, it has come at a cost, with forex reserves depleting by almost $100 billion this year. Slowing growth in the US and European Union could impact India’s services exports. Indian policymakers need to take a more balanced view in this situation, not merely mimicking the central bank of advanced economies, but taking decisions that do not go against the still-fragile domestic recovery. Addressing supply-side disruptions rather than throttling demand could be a better way to control prices.

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