A regime shift has occurred, taking monetary policy into a new era as recessions are looming in the world's major economies, according to Schroders' senior European economist and strategist.
Global central banks have been raising interest rates at an "alarming pace" over the past few months, said Azad Zangana, heralding the "the dawn of new regime in monetary policy and financial markets".
At its meeting in July, the US Federal Open Market Committee (FOMC) raised the federal funds rate by 75 basis points to between 2.25 per cent and 2.50 per cent.
This means the most important interest rate for the global economy has risen five-fold in the space of three months, negatively impacting both government bonds worldwide and risk assets, such as share prices.
The European Central Bank raised all of its main interest rates by 50 bps, ending eight years of negative interest rates, and even the Bank of England surprised the market by raising rates by more than the market had expected.
"The era of zero or even negative interest rates is over. A definitive regime shift has occurred, taking us into a new era," Zangana wrote in a release on September 1.
"That said, more seasoned investors may see this as a return to more normal times, akin to the period before the global financial crisis in 2008.
"However, that is yet to be seen. It could be that the stagflation (a period of persistently high inflation combined with high unemployment and stagnant demand) experienced in the late 1970s and early 1980s may be the more appropriate comparison."
Recessions looming
The new interest rates mean recessions are now expected in the US, UK and Europe in the next year.
"All three of these markets will experience significant declines in output over the course of the next year, and the outlook for the global economy is grim," wrote Zangana.
Inflation is now one of the biggest concern for households, he said, and with central banks seeking to tame high inflation, monetary policy is constrained, leaving governments to ease the pain of higher inflation where possible.
Coupled with the energy crisis, this has led Schroders to downgrade global economic growth markedly, with recessions now predicted for the US, the eurozone and UK, while most emerging markets are also expected to see slower growth.
It expects global growth to slow from 5.9 per cent to 2.6 per cent this year (revised down from 2.7 per cent) and to slow to 1.5 per cent in 2023 (previously 2.7 per cent).
Apart from during the height of the Covid-19 pandemic, this would be the worst year for the global economy since 2009, said Zangana.
"We have downgraded US economic growth from 2.6 per cent in May to 1.7 per cent for 2022, significantly lower than market estimates of 2.1 per cent growth," he wrote.
