Risk of recession may have surged amid inflation fight

Central banks seen as losing control over fallout as they persist with large rate hikes

- Ovais Subhani

Key central banks are probably losing control over the economic fallout amid their unwavering commitment to fight stubbornly high inflation with large interest rate hikes.

If history is any guide, aggressive rounds of rate hikes - or monetary policy tightening, as it is known usually do not result in an orderly economic slowdown with slower growth purging inflation without causing a recession.

Add to this the lingering crisis of confidence following bank failures in the United States and the collapse of one of Europe's biggest financial institutions, and it is clear why many analysts believe the risk of a downturn has risen considerably.

The recent rate hikes by the European Central Bank, the US Federal Reserve and the Bank of England were an attempt to shore up confidence in their ability to manage inflation and financial stability - both integral to their mandates.

But if another bank blows up in the coming days, their rate decisions will be seen as acts of bravado, putting their credibility at risk.

For instance, US regional lender First Republic Bank received another credit ratings downgrade as Fitch Ratings followed its peer S&P Global.

Moody's has already placed the troubled bank on review for a possible downgrade.

The bank's shares have lost nearly 90 per cent of their value since March 8.

"Recent market volatility highlights the peril of a loss of market confidence," said Ms Madhur Jha, head of thematic research at Standard Chartered Bank, referring to the global sell-off last week sparked by the failure of Silicon Valley Bank.