Since 2022, central banks have raised their benchmark interest rates in response to inflation in many countries rising to levels that have not been seen in decades, including the U.S. However, this battle has been complicated by the recent bankruptcy of SVB after being exposed to the risk of too high interest rates, disturbing the banking system on both sides of the Atlantic.
However, according to IMF Director-General K. Georgieva, central banks should continue to contain inflation by rate hikes despite concerns that this could put additional strain on the banking sector. The IMF called on member countries to continue tightening monetary policy to cope with prolonged high inflation.
K. Georgieva said that central banks must continue to fight against inflation in a much more difficult and complicated environment, in which priority is given to combating inflation and then supporting financial stability through different tools.
In the context of increasing geopolitical tensions and high inflation, it is difficult for the world economy to recover strongly. This will adversely affect the economic prospects of all countries, especially the most vulnerable. Global GDP growth will drop by nearly 50% in 2022 to 3.4% due to the impact of the conflict in Ukraine, which has disrupted the post-COVID-19 recovery.
The IMF forecasts that the global economy will grow by 2.8% in 2023 and 3% in 2024, both 0.1 percentage point lower than forecasted in January. The reduction in world economic growth forecasts reflected the weakening state of some major economies as well as the ability of central banks to continue tightening monetary policy to curb rising inflation.
The IMF warned that lurking weakness in financial markets could erupt into a new crisis and affect global growth this year. Those weaknesses could be a lack of preparation to deal with the impact of a rate hike.
According to IMF officials, such risk factors have increased rapidly after many bank failures. Specifically, some investors are looking for weak links that could lead to the spread of bank failures. Despite the above warnings, IMF chief economist Pierre-Olivier Gourinchas said inflation remains a more worrying issue, and the price stability should take precedence over financial stability risks for central banks’ monetary policy. He stressed that it is only when a very serious financial crisis occurs that this priority should be reversed.
The fight against inflation poses challenges from the tightening of monetary policy to the global economy. Finance ministers and central bank governors of the Group of 20 rich and emerging economies (G20) met in Washington D.C. in the U.S. to discuss this issue in the context of many concerns about slowing economic growth following sharp interest rate hikes in major economies.
High interest rates and the strong increase of USD have made it difficult for developing countries to repay debt in USD as borrowing costs rise.
A continued slowdown in almost all the world's advanced economies is expected to drag global growth below 3% this year, according to the IMF. Emerging markets in Asia are expected to post significant growth, with India and China forecast to account for 50% of total growth this year, while up to 90% of advanced economies in the world will record slower growth. As such, the IMF noted that the world economic growth is forecast to remain weak in the short and medium term.
Global GDP could be around 3% over the next five years, the lowest medium-term forecast since the 1990s. Low-income countries are likely to suffer a double shock from high borrowing costs and a demand for their exported goods, which could increase poverty.
Forecasts about slowing economic growth as well as challenges posed to the global financial system show that the world economy is still covered by the "black shadow" of inflation. Inflation control and price stability are still the current priorities and the fight against inflation continues to face many challenges.
