Simultaneous rate hikes could lead to ‘series of financial crises’, World Bank warns

(Kitco News) The global fight against inflation in the form of aggressive and simultaneous rate hikes by central banks raises the risk of a recession and a series of financial crises in 2023, the World Bank said in a report.

The global trend of excessive interest rate hikes by many central banks poses a risk to the global economy.

This kind of “some degree of synchronicity” between central banks has not been seen in the past five decades, the bank said in a new study published last week. But their efforts do not guarantee that stubbornly high inflation will return to the required level.

“Investors expect central banks to raise global monetary policy rates to nearly 4 percent through 2023 — an increase of more than 2 percentage points from their 2021 average,” the report said. “Unless supply disruptions and labor market pressures abate, those interest rate hikes could push global core (excluding energy) inflation to about 5 percent by 2023 — nearly double the five-year pre-pandemic average.”

And higher-than-expected inflation could force central banks to raise more than previously thought. According to the report’s model, central banks may need to raise interest rates by an additional 2 percentage points, the World Bank said.

And if these rate hikes are coupled with stress in the financial markets, the global economy would suffer by slowing to 0.5 percent by 2023. This would be a 0.4 percent contraction per capita and meet the technical standards. definition of a global recession, according to the World Bank.

“Global growth is slowing sharply, and it is likely that growth will slow further as more countries enter recession. My major concern is that these trends will continue, with long-lasting consequences that will be devastating for people in emerging markets and emerging economies,” according to the World Bank Group. President David Malpass.

To control inflation, the World Bank proposes stimulating production rather than reducing consumption through interest rate hikes. “Policies should aim to generate additional investment and improve productivity and capital allocation, which are critical to growth and poverty reduction,” explains Malpass.

A global recession seems highly likely given several historical indicators, the report added.

“The three largest economies in the world – the United States, China and the Eurozone – are slowing sharply. Under the circumstances, even a moderate blow to the global economy in the coming year could send it into recession,” the bank said. . “A slowdown – such as the one currently underway – typically calls for counter-cyclical policies to support activity. However, the threat of inflation and limited fiscal space is spurring policymakers in many countries to withdraw policy support, even as the global economy greatly slows down.”

The problem with this year’s rate hikes is that they’re all out of sync, said Ayhan Kose, the World Bank’s acting vice president for equitable growth, finance and institutions. And that amplifies the effects of global tightening and amplifies the global slowdown.

“Global coordination can go a long way in increasing food and energy supplies. For energy commodities, policymakers should accelerate the transition to low-carbon energy sources and take action to reduce energy consumption,” the World Bank advised. “Policymakers need to work together to eliminate bottlenecks in global supply.”

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