(Bloomberg) – The European Central Bank and the Bank of England will have to keep raising interest rates “to avoid the spiral,” noted economist Nouriel Robini warned.
Most read from Bloomberg
Notorious pessimist Robini said the recent rise in oil prices would keep inflation under control and that any talk of easy monetary policy was premature. The ECB and BOE face more trouble than the US Federal Reserve because inflation in Europe is still rising fast and growth is slowing, he said.
The BOE “should be hiking rates up to 5.75%,” Robini said in an interview on Bloomberg Television on Monday. The UK central bank’s key rate is currently 5.25%, with a further quarter point increase expected this week.
Roubini, a professor of economics and international business at New York University’s Stern School of Business, is famous for his secretive speeches, earning him the nickname “Dr. Dom.” However, he rightly warned of danger before the 2008 financial crisis and was often followed for his usual contrarian views.
On Monday, he suggested shorting U.S. stocks for the rest of the year, saying investors were too bullish on credit and bond markets. He warned that US stocks could drop 10 percent in light of the global economic situation.
The central banks of the Eurozone and the United Kingdom need to raise their rates to beat inflation as inflation is too high and the economy is slowing, he said.
“This is a dilemma for both the ECB and the BOE,” Robini said. “On the one hand, the contractionary economic activity will probably cause them to stop at this point. On the other hand, if inflation is much higher than planned, they may need to raise it even more.”
The United States is in a strong position, the “good news” being that there is no “hard landing” for the economy. But he said markets were wrong to expect a rate cut early next year. Instead, he said the Fed may still need to raise rates and that the first cuts will be “probably in the middle of the year (2024).”
“You can’t say you’re done. Headlines: Inflation rising, oil prices up, another hike likely” The Fed is expected to hold rates at 5.25%-5.5% this week.
The latest dovish signals from the BOE are “troubling”. “The signs are telling us they’re not sure if they want to walk more,” he said. Without further price increases, he warned, “inflation and real inflation may decline.”
As the economy began to slow, the BOE changed its guidance. In July, the results fell and unemployment is rising. UK policymakers are talking about longer-term rates rather than pushing further increases to tame prices. Consumer inflation is currently 6.8% – more than three times the target of 2%.
Official figures this week showed UK inflation rose to 7.1% in August, with oil prices expected to complicate the BOE’s decision on Thursday. The ECB last week raised the benchmark rate to 4% and signaled that the rate hike cycle is coming to an end.
Although Roubini believes higher prices are needed, he says they threaten to create their own problems.
Referring to the pension crisis in the UK a year ago and the regional bank implosion in the US earlier this year, he said: “There are risks of financial instability. You saw what happened in the UK a year ago, you saw what happened in the spring of this year with the stress in the financial system. I don’t think we’re out of the woods as rates should hold up longer. The possibility of some degree of financial instability is still with us.
Structural changes in the global economy — from aging demographics to supply chain geopolitics — will drive inflation higher, he said. As such, central banks should raise inflation from 2% to 3% or 4% over time, he said.
“There are reasons on both the supply and demand side that 2% is mission impossible at this level. And the new normal may be 3% to 4% for advanced economies over time, certainly not overnight,” he said.
–With help from Danny Berger and Manus Cranny.
(Updates with interview comments)
Most read from Bloomberg Businessweek.
©2023 Bloomberg LP
