Rate hikes — a double-edged sword for central banks

Central banks worldwide are using aggressive interest rate hikes to lasso galloping inflation, at the risk of pulling down the global economy with it. The US Federal Reserve and its counterparts in Europe and most emerging economies have been raising rates this year as consumer prices have soared to decades-high levels. While higher rates aim to tame runaway inflation by slowing economic activity, they can cause a recession if borrowing costs become too steep for businesses and individuals. “It reminds me what used to happen in the Middle Ages: bloodletting,” Nobel laureate economist Joseph Stiglitz told AFP, referring to the belief at the time that patients could be cured from illnesses by making them bleed. “When they let out the blood, the patient didn’t recover, usually, unless a miracle happened. And so they let out more blood and the patient got sicker and sicker,” Stiglitz said.