Top Economy stories: ‘Difficult to bring down inflation without a recession’, Fed’s Esther George says; Eurozone banks could be set for a big hit; Japan’s economy unexpectedly shrinks
1. Is a recession needed to end US inflation?
Inflation is at risk of becoming entrenched in the economy because of an overheated job market, making it difficult for the US Federal Reserve to bring down inflation without a recession, says Kansas City Federal Reserve President Esther George.
"I'm looking at a labour market that is so tight, I don't know how you continue to bring this level of inflation down without having some real slowing, and maybe we even have contraction in the economy to get there," George told The Wall Street Journal.
George last week reiterated her support for a slower pace of US interest rate increases, calling for a "more measured" approach that gives the central bank time to judge how the rises in borrowing costs are affecting the economy, Reuters reports.
"I continue to see several advantages for a steady and deliberate approach to raising the policy rate," George has said.
The Fed has lifted short-term borrowing costs at an extraordinarily fast pace this year, including four straight 75-basis-point hikes that have brought the central bank's benchmark overnight interest rate from near zero in March to the current 3.75-4.00%.
2. Eurozone banks could face substantial hit as households suffer, ECB warns
Eurozone banks may see a surge in “soured loans” as rapid inflation and rising interest rates hit household incomes, particularly among the bloc's poorest, the European Central Bank (ECB) said in a fresh study on 15 November. Soured loans are loans where the borrower has made no payment for 90 days or more.
With inflation rising to double-digit territory, households are burning through their savings with little respite in sight as income growth trails far behind. This is especially true for the poorest, who are disproportionately hit by surging food and fuel costs, Reuters reports. "While outright defaults are likely to increase only slightly, the downside risks to banks’ asset quality are increasing, especially in vulnerable countries," the ECB said.
Europe's banks also risk a significant hit to their profits if house prices across the region begin to slide, regulators and ratings agencies have warned. Banks have "substantially" increased their exposure to mortgages in recent years, and are seeing some early signs of asset quality deterioration, the European Banking Authority said.
(Source:World Economic Forum)