World Bank warns of risk of higher rates due to global recession

The World Bank has warned that major central banks run the risk of sending the global economy into a “catastrophic” recession next year if policymakers raise interest rates too much in the coming months and put pressure on financial markets.

The Washington-based organization called on monetary authorities in large economies to coordinate their actions to reduce overall tightness.

Central banks, led by the US Federal Reserve, have launched a series of aggressive rate hikes during 2022, at or close to containing inflation for the first time in decades in many advanced economies. ,

Energy and food prices have soared since Russia’s invasion of Ukraine in late February, adding to the cost of living crisis.

To keep inflation from turning down, the World Bank urged governments to provide targeted relief to vulnerable households instead of relying on strict monetary policy.

World Bank President David Malpass said the global economy is losing momentum and more countries are already falling into recession. “My deep concern is that these trends will persist with long-lasting consequences that are disastrous for people in emerging market and developing economies,” he said.

He called for more action to boost production to ease inflationary pressures rather than focus on curbing spending. Increased investment will improve productivity and capital allocation, which are critical for growth and poverty reduction, he said.

The World Bank did not provide new forecasts for the global economy, but noted that the outlook for 2023 was slipping as rich and poor countries alike responded to high inflation this year by seeking to limit spending.

“Central banks around the world are raising interest rates this year at a rate not seen in the past five decades – a trend that is likely to continue well into the next year,” the World Bank said.

The warning comes ahead of key policy votes at the Fed and the Bank of England next week. The US central bank is expected to raise rates by 75 basis points for a third consecutive meeting on Thursday, while Britain’s borrowing costs are expected to rise by 50 basis points.

The World Bank warned that an expected increase in global interest rates would hit inflation, but not enough to meet central banks’ target, which is usually around 2 percent. Core global inflation, excluding energy, was likely to run at 5 per cent next year – double the pre-coronavirus pandemic rate.

According to the World Bank, if this level of inflation persuades central banks to become more aggressive, global economic growth will fall to 0.5 percent in 2023.

The World Bank said it would meet most definitions of a global recession three years after the previous one, because with population growth, average global income would fall.

In its modelling, the bank stated that monetary policy needed some tightening, but with it every effort to reduce barriers, both international and domestic, as well as allowing output to increase without raising inflation. needed.

This includes boosting the supply of goods, food and energy to reduce global inflationary forces, as well as investing to decarbonize economic growth.

The bank’s findings have been echoed by former IMF chief economist Maurice Obstfeld, now a senior fellow at the Petersen Institute for International Economics.

Obstfeld said, “Just as central banks, especially those of wealthier countries, misrepresent the factors driving inflation in 2021, they may also underestimate the speed with which inflation could fall as their economies may be slower.” Less “enthusiast” in raising interest rates.

“Together all going in the same direction, they risk reinforcing each other’s policy effects without taking into account the feedback loop,” he said.

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