Interest rate hikes are a blunt but dangerous weapon in…

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Interest rate hikes are a ‘brutal but dangerous weapon’ in the fight against searing inflation, which is hitting low-income households the hardest, warns the CEO of one of the largest independent financial advisory organisations, asset management and fintech companies in the world.

The warning from deVere Group’s Nigel Green comes as the average global inflation rate hits 7.4%.

In the United States, the United Kingdom and Germany, inflation has reached its highest rate for 40 years. Consumer price growth has even started to soar across Asia, a region that until recently had largely managed to avoid the broad global trend.

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Inflation in Latin America’s largest economies is the highest in 15 years; the overall rate in sub-Saharan Africa is expected to reach 12.2% this year; the Netherlands has almost tripled this year to 9.2%; and Australia’s doubled to 5.3%.

Nigel Green says: “Inflation is a serious global problem. Fears of a return to the chronic inflation and recessionary landscapes of the 1970s are real.

Interest rate hikes are a blunt weapon

“In an attempt to combat the scourge of soaring prices, central banks around the world are raising interest rates. The theory goes that when interest rates are higher, less money will be spent. When less money is spent, the prices of consumer goods increase more slowly.

“But rising interest rates are a blunt weapon in this fight.

“Rising borrowing costs can do little to combat inflation triggers on the supply side of economies, such as unprecedented shipping backlogs or shortages of materials and labor. labor, the Covid lockdowns in China and the war in Ukraine.”

He continues: “Raising interest rates to fight inflation is also a dangerous weapon.

“Inflation hits low- and middle-income families up to a third harder than the wealthiest, research shows, because they have to spend a greater proportion of their income on essentials such as food and electricity. energy.”

Clearly, something must be done to protect the poorest families from the worst effects of rising prices.

“However, raising interest rates may not be the solution? Why? Because low-income households are most likely to have credit – and higher interest rates mean higher borrowing costs,” says deVere Group CEO.

“Furthermore, it intentionally slows the economy, which could then trigger a recession and hamper business efforts to invest and create jobs, which, again, would have a greater negative financial impact on the poorest families. poor.” Nigel Green concludes: “The most effective weapons in the fight against inflation are not within the purview of central banks.

“The best measures are to get a conclusive international grip on the pandemic, stop the war in Ukraine, fix supply chain issues and dramatically increase green energy production – energy demand is only expected to increase. that over time and rising interest rates will not be enough to dampen demand.

About the deVere Group

deVere Group is one of the world’s largest independent advisors of specialist global financial solutions for international, high net worth and high net worth clients. It has a network of over 70 offices around the world, over 80,000 clients and $12 billion under advisory.

Updated on June 13, 2022 at 10:09 a.m.


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