The World Bank published a report today in The Financial Times, saying that rapid interest rate increases aimed at surrounding inflation in product and asset prices, could give way to another recession in US and European countries, as their economies are recovering quite slowly.
The World Bank President, Robert Zoellick, said in the report that waiting for bubbles to burst and then cleaning up the aftermath is now a new lesson of what not to do.
According to him, the interest rates, tightened too much could lead to another downturn, especially in the case of countries that are showing weak recovery signs.
Also, as Australia’s central bank has increased the interest rates, it may pressurize other Asian countries that have close links to Australia’s economy to follow the trend as well.
But as the Fed has kept its rates near to zero, such actions by other countries would help the Asian currencies to appreciate, making their exports much more expensive and decreasing the overseas sales, in turn causing harm to the recoveries based on exports.
Moreover, there is an ever-increasing competition from China. Chinese goods are getting cheaper to buy as compared to Asian rivals, as the Yuan is tied to the declining dollar.
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