Central banks are also increasing the interest rates to help them fight inflation. This is an action that directly contributes to the rise of borrowing costs worldwide The increased interest rates mean that loans will cost the consumer or business more. This minimizes expenditure and investment. This economic shrinking in order to promote economic growth later exposes the economy to imminent recession.
The increase in the cost of borrowing is a factor that compels buyers to reduce the amount of money they spend on the purchase of goods and services. Firms have to raise costs in financing and this will limit their investments and even their employment. Such universal decline in demand depresses economic activity. The declining demand is one of the major factors that drives economies into recession. The impact is immediate and huge.
The rates of increases are historically fast. Setting the rates that are too high or stepping up the rates too rapidly boosts the chances of a downturn. Central banks threaten to make the recession they are trying to prevent by over tightening policy. The super-aggressive tightening trajectory moves the probability of recession in the short-term to higher levels all over the world.
The consequence of a high debt is increased by rate increases. There is a dramatic increase in the cost of paying down debts to governments and businesses as well as consumers. This further escalated the financial crunch further putting at risk the available spending and investment capital. The pressure that this will have on balance sheets further magnifies the contraction of an economy with higher rates.
Central banks are cognizant of the elevated risk of recession but their priority is to control inflation They regard incessantly excessive inflation as the bigger threat This can be seen by their intentions to increase the rate, even during recession times. This policy position remains the key upholding of high global recession risks
Conclusion:
The latest rate rises by central banks portend significant risks of recession in the global economy Increased borrowing rates will have a direct effect in the form of decreasing consumer spending and business investment that will shrink the economic activity. A significant contractionary impact is exerted by the aggressive nature of increases and the high debt levels all over the globe. Central banks are focused on combating inflation, but their policies make it substantially more probable that the world would sink into a downturn generated by policy in the short term.
