Central banks have eased up on the interest rate hike, but the global economy is far from a safe landing. Image Credit: Shutterstock

Inflation rates in many economies have seen small declines, providing hope that further progress can be made to reduce these to around the 2 per cent target in Europe and the US. This led to the recent easing of interest rate hikes, particularly after the US, which went in for a 0.25 per cent rise, the smallest increase in almost a year. It takes the overall US base rate to 4.75 per cent, and the highest in 15 years.

The US move was followed by GCC’s central banks, with the exception of Qatar, which decided to keep interest rates unchanged and which may have some financial and economic implications. The interest rate was raised by 0.5 per cent in the eurozone and the UK.

Although inflation rates in the West have fallen to 8.5 per cent on average, they still exceed 10 per cent in some systemically important economies. However, the factors that pushed inflation rates up are still unstable, prompting US Fed Chair Jerome Powell to say: "The battle is not yet close to finish,". A warning that carries a lot of credibility.

There are two approaches, the first of which lies in reducing inflation rates, while the second is bringing interest rates under control to minimize their effect on growth to avoid an expected economic recession.

As for inflation, the most important reasons of inflation lie in the significant rise in energy prices that coincided with the start of the Ukraine-Russia war, where the price of a gallon of gasoline in the West doubled to $5.5. However, it has fallen to $ 4.5 in recent weeks, and with the subsequent reduction in inflation rates.

The Russian oil factor

The prices of many basic commodities, especially food, continued to rise during the same period. Last month, food commodity prices increased 14 per cent, while prices of manufactured commodities rose 7 per cent in eurozone. This ensured lower inflation was not reflected for consumers, with prices of basic commodities expected to continue to rise.

The main factor for low inflation is energy prices, which remain volatile, caused by factors related to the global economy as a whole, as well as to more aggravation geopolitically.

On February 5, the EU started implementing its decision to ban imports of Russian oil products, a decision whose effects have not yet become clear and may yet cause a supply shortage. And consequently lead to a rise in their prices.

The return of demand from China strongly may change some calculations and raise prices, which will in turn lead to higher energy prices. In this case, central banks will be forced to recalibrate their approaches, further slowing down economic activity. It is possible that the Western economies may be exposed to a recession which they are now trying to avoid in any way possible.

GCC still faces uncertainty

What about the impact of these two factors at the GCC level? As for the first factor related to inflation, energy prices remained almost unchanged in the GCC, which played a decisive role in reducing inflation and rising prices.

The appreciation of the US dollar, pegged to the GCC’s currencies, has in turn limited the rise in prices of imported goods, another major factor in curbing inflation rates. The inflation rate in the GCC has reached half that in the European Union.

As for the possibility of a recession brought on by higher interest rates, this will have limited effect in the GCC. But if a recession occurs in the main economies, this will have repercussions for all, especially as it will lead to a decline in demand for oil and thus on prices of oil and its derivatives.

In this case, the recession will be global…