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Central Banks Risk Recession Raising Rates Amid Iran Oil Shock

A strategist warned that central banks risk causing a global recession by hiking interest rates in response to energy price shocks, which are supply-side in nature. Julian Howard argues that raising borrowing costs is an inappropriate remedy for such inflation. While the ECB and BoE recently held rates steady, market sentiment anticipates potential rate increases from the ECB in June. Meanwhile, the RBA has already raised rates to 4.35% following inflation spikes. Howard highlighted that monetary policy cannot solve physical commodity shortages, pointing to the core energy cost as the primary issue.

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Central Banks Risk Recession Raising Rates Amid Iran Oil Shock

A prominent strategist warns that central banks risk triggering a global recession by raising interest rates to combat soaring energy costs stemming from supply shocks. Julian Howard suggests that hiking borrowing costs is an inappropriate policy response to energy price inflation.

The Core Warning: Policy Error Ahead

Julian Howard, a chief multi-asset investment strategist at GAM Investments, cautioned that central banks are approaching a potential policy mistake. He argued that the conventional response of increasing borrowing costs is flawed when the root cause of high energy prices is a supply-side shock.

According to Howard, the necessary interest rate hikes required to curb energy consumption—such as stopping gasoline purchases or air travel—would be excessively high and highly likely to induce a recession.

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Global Monetary Divergence and Expectations

While some major central banks have recently maintained stable rates, market expectations suggest potential shifts. The Reserve Bank of Australia (RBA) has already taken action, while others face mounting pressure.

  • European Central Bank (ECB): The ECB held rates steady last week, despite eurozone inflation reaching 3% in April. However, investors are currently pricing in a potential rate hike from the ECB in June.
  • Bank of England (BoE): The BoE also kept rates unchanged as the UK manages higher oil prices. Nevertheless, BoE governor Andrew Bailey indicated that a prolonged energy price shock could compel the bank to adjust borrowing costs.
  • Reserve Bank of Australia (RBA): The RBA has proactively increased rates by 25 basis points, bringing the rate to 4.35%. This move followed March data showing headline inflation rising to 4.6%.

The Energy Constraint

Howard emphasized the fundamental limitations of monetary policy when dealing with commodity shortages. Speaking on CNBC's "Squawk Box Europe," he noted, "Central banks can't print molecules of oil." He stressed that the immediate concern for central banks is the actual cost of energy.

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