Growth versus interest rate dilemma decoded

economictimes.indiatimes.com:

New Zealand is only the latest country to have slipped into recession in June 2023, after the nation’s GDP fell for two consecutive quarters. The slowdown followed the benchmark interest rate being hiked by New Zealand’s central bank for 12 successive times in a bid to control inflation, taking the rate to its highest since 2008. Germany had entered a technical recession at the end of May, closely followed by 20 eurozone nations by June 8.

The European Central Bank (ECB) had been facing the dilemma posed by slowing economic growth and rising inflation, embarking on a monetary tightening regime in July 2022. The ECB and other European central banks had been close on the heels of the US Federal Reserve (Fed) hiking rates to curb inflation. The Fed had raised interest rates 10 straight times till it decided against an 11th hike on June 14, 2023.

However, the US central bank did caution that there could be another two 25 bps hikes before end-2023. But the Western world isn’t the only geography facing the dilemma of growth vs. interest rates.

The South African Reserve Bank (SARB) raised interest rates to a 14-year high on May 25, marking the 10th successive rate hike. The SARB is also walking the tightrope between reining in inflation and driving the anaemic economic growth. There could be further rate hikes on the cards despite the continuing power outages, the strain of inflation on households and businesses, and a weakening currency.Understanding the dilemmaThe problem with higher interest rates is that households have less disposable income post higher interest outgo, which leads to lower spending.