"Anyone who believes that central banks should halt interest rate hikes lacks an understanding of history"
"Anyone who believes that central banks should halt interest rate hikes lacks an understanding of history"
Head of Global Marketing Strategy at Clal Insurance, Amir Argaman, discussed the resurgence of global inflation at Calcalist and Bank Leumi's National Economic Conference
"In the 1990s, the average inflation rate in the United States was around 2%. However, in 2020, due to the COVID-19 pandemic, inflation soared to 9%. The pandemic disrupted the global system, leading to reduced production, decreased consumer activity, and supply chain disruptions. Additionally, the Russia-Ukraine conflict exacerbated the situation. Although inflation has now dropped to around 3%, we cannot attribute its decline solely to these factors,” said Amir Argaman, Head of Global Marketing Strategy at Clal Insurance, speaking at Calcalist and Bank Leumi's National Economic Conference.
"Since 2008, we have grown accustomed to the U.S. central bank printing money and maintaining low-interest rates. In 2020, this approach escalated, with governments injecting substantial funds into the global economy. These accumulated funds have translated into increased demand in recent years. People who previously refrained from purchasing cars or traveling are now resuming these activities. Consequently, we have transitioned from supply-driven inflation to demand-driven inflation, from non-sticky inflation to sticky inflation. It is important to note that sticky inflation, such as inflation in services, has long-term implications.
"For example, if a landlord increased rent by NIS 500, they are unlikely to reverse the decision. This is where the challenge lies for central banks. Those advocating for aggressive interest rate hikes often fail to understand the complexity of the situation. High-interest rates, over time, have detrimental effects on real estate, companies, and consumption. Mortgaged individuals have less disposable income, affecting overall economic stability. The central banks face a difficult task: managing inflation that is influenced by past events, while the impact of interest rate adjustments takes 12 to 18 months to materialize.
"Hence, it is challenging for central banks to fully control the situation. So, what should we expect from them? Anyone who believes that central banks should adopt a softer approach and halt interest rate hikes lacks an understanding of history. A central bank that raises interest rates too quickly and withdraws support prematurely risks triggering double-digit inflation. Occasionally, the market creates its own narratives, like the role of artificial intelligence (AI). While there is a narrative about AI improving company efficiency, its actual benefits may be more limited. For instance, consider the case of Zoom. During the pandemic, Zoom became integral for remote meetings, leading to a significant increase in stock value. However, the subsequent decline by 90% demonstrates the volatility and unpredictability of markets. Inflation is largely under control, but central banks will remain cautious until the situation stabilizes."
