With inflation rates at multi-decade highs, central banks in G7 nations have been rushing to raise interest rates鈥攕ome more aggressively than others.
But despite the intentional hikes, data shows that consecutive rate hikes may not be doing much to bring down the stubbornly high inflation rates to pre-pandemic levels.
Interest rate hikes in G7
Most G7 nations, with the exception of Japan, have been aggressive in increasing interest rates amidst the forecast of a possible recession.
The Bank of Canada raised its interest rate to 3.75 per cent from 3.25 per cent, while predicting Canada could see a potential recession in the first half of 2023,
The U.S. Federal Reserve has been most aggressive with its interest rates. In January 2022, its policy rate ranged between zero and 0.25 per cent, but the most recent interest rate in November ranges between 3.75 and 4 per cent.
While the Federal Reserve hiked rates by 75 basis points, the Bank of England increased its interest rate to 鈥� the most since 1989鈥� warning that the British economy might not grow for another two years.
Germany, Italy, and France face the same interest rate as the recently raised its interest rate to two per cent in November from zero in January this year.
Average G7 Inflation rate rises to 7.7 per cent
Recent data released by the intergovernmental shows that the average inflation in G7 reached 7.7 per cent in September, from
鈥淭his rise occurred even though energy price inflation slowed in all G7 countries except Germany,鈥� the OECD said in the release.
Inflation鈥攅xcluding food and energy increased across all G7 countries, except France. But it rose significantly in Germany, according to the OECD report.
Inflation on food and energy prices continued to drive up overall inflation in France, Germany, Italy, and Japan.
A grim growth outlook
The cost-of-living crisis, tightening financial conditions, Russia鈥檚 invasion of Ukraine, and the prolonged COVID-19 pandemic are all weighing heavily on the G7 growth outlook.
According to the Bank of Canada鈥檚 monetary policy report, GDP growth is projected to slow to between 0 per cent and 0.5 per cent through the end of 2022 and the first half of 2023.
鈥淲hat that means is that, yes, a couple, two, three-quarters of slightly negative growth is just as likely as two or three-quarters of slightly positive growth,鈥� said Bank of Canada Governor Tiff Macklem during . 鈥淭hat's not a severe contraction, but it is a significant slowing of the economy."
The latest world economic growth projections have fallen for nearly all G7 countries (the exception being Japan) according to the recent report released by the .
Pacing interest rate hikes
In order to restore price stability, the pace of tightening has accelerated sharply by central banks in G7 nations. However, there are risks of both under and over-tightening, experts at the
Raising interest rates is a delicate balancing act and have led to recession.
In contrast, a slow response to inflation erodes the credibility of central banks, allowing high prices to stay longer, and pushing people to buy more with an expectation that prices will continue to rise further.
In a press conference on June 15, 2022, , 鈥淭here鈥檚 always a risk of going too far or not going far enough, and it鈥檚 going to be a very difficult judgment to make.鈥�
