The UN has warned central banks to stop increasing interest rates over fears that there will be a global recession. In recent months, central banks around the world have been hiking interest rates in a bid to bring down soaring inflation. However, the UN has called for banks, including the US Federal Reserve and the Bank of England, to rethink the monetary policies they have been pursuing.
The United Nations Conference on Trade and Development (UNCTAD) claims that continued interest rate hikes could lead to a worse global recession than the one seen in 2008. Central banks have been steadily increasing rates, with some taking them from record lows to levels that have left borrowers struggling to pay their mortgages. In the UK, the base rate has increased from a record low of 0.1% in December 2021 to 2.25%.
The slowdown could become a major recession
UNCTAD published its Trade and Development Report 2022 earlier this week. In the report, concerns were expressed that the rapid tightening of monetary policy currently being experienced could result in an economic slowdown turning into a significant recession.
The report further claimed that the impact and after-effects of such a recession could cause more damage than the previous global financial crisis and the global pandemic.
The US Federal Reserve’s actions relating to interest rates were mentioned specifically in the report, which read: “This year’s interest rate hikes in the United States are set to cut an estimated $360 billion of future income for developing countries (excluding China) and signal even more trouble ahead.”
Speaking to the Wall Street Journal, the lead author of the report, Richard Kozul-Wright, said central banks needed to look at other ways of tackling inflation rather than focusing on interest rate increases. One example he gave was to place price caps funded by one-off taxes on higher-level profits made by energy firms.
In addition, the UN said that a combination of Brexit and other international factors had created a ‘series of headwinds’ that could see the UK economy contract 0.9% next year. The report read: “External adversities stemming from sluggish global demand, exchange rate instability and yet unresolved Brexit shortcomings are contributing to current account challenges.”
UNCTAD said another major contributor to economic contraction in the UK next year would be the cost-of-living crisis, which has resulted in weaker consumer demand.
The report claims that the global economy is expected to grow by 2.5% this year, but this is more than 1% lower than the growth projected in the 2021 report. It was further stated that the situation would worsen, as growth is likely to decelerate further next year to 2.2%.