Runaway global inflation fears if banks don’t raise interest rates: IMF

Runaway global inflation fears if banks don’t raise interest rates: IMF

April 19, 2022

Central banks need to raise interest rates in the near future to prevent inflation from running away as the war in Ukraine adds to global economic woes just as many countries emerge from the pandemic slow-down.

The International Monetary Fund’s World Economic Outlook forecasts that as high food and fuel prices begin to bite, inflation for 2022 will be 1.8 percentage points higher in advanced economies and 2.8 percentage points higher in emerging and developing countries.

The International Monetary Fund says interest rates may have to rise faster than predicted to reign in inflation.Credit:AP

Global economic growth is also forecast to be 1 percentage point lower this year than predicted by the IMF in January. But even those projections could be thrown out the window if the war spreads beyond Ukraine, if economic sanctions on Russia extend to include energy supplies, if worse variants of COVID-19 lead to further lockdowns or if China’s downturn becomes prolonged.

“Inflation has become a clear and present danger for many countries,” IMF economic counsellor and director of research Pierre-Olivier Gourinchas said. “Uncertainty around these projections is considerable, well beyond the usual range.“

Australia’s inflation is forecast to reach 3.9 per cent this year, according to the fund, exceeding the target of 2-3 per cent for underlying inflation set by the Reserve Bank. Australia’s GDP is forecast to reach 4.2 per cent.

The RBA expects underlying inflation to be above 3 per cent for March, according to minutes from its last board meeting published on Tuesday, and noted the likely timing of an interest rate rise had now been brought forward.

The bank is widely expected to begin lifting rates in June, with the four major banks predicting up to five interest rate hikes over the second half of the year.

Tobias Adrian, financial counsellor and director of the IMF’s monetary and capital markets department, said central banks should take decisive action to keep inflation expectations in check.

IMF financial counsellor Tobias Adrian said central banks should take decisive action to stop inflation from becoming entrenched.Credit:Bloomberg

“Interest rates might have to rise beyond what is currently priced in markets to get inflation back to target in a timely manner,” he said. “This may entail pushing interest rates well above their neutral level.”

The effects of the war in Ukraine would be felt globally “like seismic waves”, Gourinchas said, because even before the war, inflation was surging on the back of high commodity prices and supply-chain pressures.

“War-related disruptions amplify those pressures. We now project inflation will remain elevated for much longer,” he said.

Russia is a major supplier of oil, gas and metals, and Russia and Ukraine are key exporters of wheat and corn. Reduced supplies have already driven up prices, which have been felt most in Europe, the Caucasus and Central Asia, the Middle East, and both north and sub-Saharan Africa.

The World Economic Outlook predicted that vulnerable populations, particularly in low-income countries, would be most affected by fuel and food price increases.

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