Economist Mohamed El-Erian says it's time to exit an artificial world of doing 'silly things' as central banks finally get their act together on inflation

• Interest rate hikes show central banks realize action is vital to curb inflation, Mohamed El-Erian told CNBC.
• The economist said it's time the market exits a zero-rate world where investors do "silly things."

Central banks are finally awake to the need to deal with persistent red-hot inflation, this week's stream of interest-rate hikes show — and it's not a moment too late, according to top economist Mohamed El-Erian.

"It's about time we exit this artificial world of predictable massive liquidity injections, where everybody gets used to zero-interest rates, where we do silly things," he told CNBC Thursday.

"Whether it's investing in parts of the market we shouldn't be investing, or investing in the economy in ways that don't make sense — 'zombie' companies, et cetera," he said.

"We are exiting that regime, and it's going to be bumpy."

El-Erian, the chief economic advisor to Allianz, was speaking after the US Federal Reserve on Wednesday raised interest rates by 75 basis points — triple the size of its typical hike and its largest one-time rate increase since 1994.

This week, central banks in the UK, Switzerland, Taiwan and Brazil have lifted interest rates. Meanwhile, the European Central Bank held an emergency meeting where it decided to create a crisis-fighting tool, after pledging last week to start to increase interest rates by 25 basis points in July.

Red-hot levels of inflation mean central banks are facing a day of reckoning, El-Erian said. Friday's data showing US inflation hit 8.6% in May, its highest level since December 1981.

"This is the great awakening of central banks to the fact that they are way behind on inflation. Words are not enough, actions are needed," he said. "Whether it's the 75 basis points yesterday, or whether today the Swiss National Bank."

The Swiss National Bank on Thursday surprised markets by hiking rates by 50 basis points, signaling a pivot from keeping its currency in check to focus on surging inflation.

"It's more significant than what happened last night, because the Swiss National Bank always fights a strong currency," El-Erian said.

"For it to get ahead of the ECB and hike not 25 but 50 shows you that we are in the midst of a secular regime change," he said. "Nobody wants a weak currency. They look at Japan, the United Kingdom. They don't want to be that."

The Japanese yen fell almost 2% against the dollar Friday, after the Bank of Japan confirmed it is sticking with ultra-low interest rates to prioritize supporting the economy over taming inflation.

Around the world, consumer prices have been rapidly rising on the back of high energy prices, driven in part by sanctions on Russia's energy industry over its invasion of Ukraine.

That has now prompted central banks to aggressively tackle inflation with higher interest rates, which some analysts fear will push the economies into a recession.

Rate hikes put particular pressure on zombie companies, which make just enough money to operate and to service their debt, but are unable to settle the actual principle. With interest rates shooting up, such companies are likely to shutter as they struggle to repay interest on their debts.

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