ECONOMYNEXT – World growth is at risk from elevated inflation, which require higher interest rates, the International Monetary Fund said while keeping projections for 2024 at 3.2 percent and slightly raising the 2025 growth by 0.1 percent to 3.3 percent.
Global inflation went up after economic buraucrats in the US, UK, Europe and many other countries printed money and states also expanded spending during Coronavirus, using some of the printed money.
The Fed in particular then delayed rate hikes claiming inflation was due to ‘supply shocks’ and while Vladimir Putin was also blamed, in a narrative that was also promoted by the IMF.
Western academics and the IMF itself call such actions, usually carried out by un-elected bureaucrats, including especially in developing countries ‘policy support’ to maintain ‘potential output’.
As a result, by 2022, inflation rose to levels not seen since the early 1980s with surging commodity prices and creating shocks.
“The risk of elevated inflation has raised the prospects of higher-for-even-longer interest rates, which in turn increases external, fiscal, and financial risks,” the IMF said in a July update to its World Economic Output report.
“Persistently high interest rates could raise borrowing costs further and affect financial stability if fiscal improvements do not offset higher real rates amid lower potential growth.
“Prolonged dollar appreciation arising from rate disparities could disrupt capital flows and impede planned monetary policy easing, which could adversely impact growth.”
Inflation rises due
So-called ‘dollar appreciation’ is an outcome of tighter US monetary policy which tends to moderate commodity prices.
However the price increases were still happening in many countries, partially due to services which were seeing lagged wage growth.
However, the gradual cooling of labor markets, together with an expected decline in energy prices, should bring headline inflation back to target by the end of 2025,” the report said.
“Inflation is expected to remain higher in emerging market and developing economies (and to drop more slowly) than in advanced economies. However, partly thanks to falling energy prices, inflation is already close to prepandemic levels for the median emerging market and developing economy.”
While advanced economies were taking steps to maintain monetary stability, and the US delayed rate cuts amid a unexpectedly persistent inflation, relatively stable emerging markets with reserve collecting central banks delayed rate cuts.
“The uptick in sequential inflation in the United States during the first quarter has delayed policy normalization.
At the same time, number of central banks in emerging market economies remain cautious in regard to cutting rates owing to external risks triggered by changes in interest rate differentials and associated depreciation of those economies’ currencies against the dollar.
The IMF however advocated monetary debasement for reserve collecting central banks and targeting domestic anchors, instead of maintaining prudent interest rates to prevent unsustainable domestic credit from de-stabilizing the external sector, worsening confidence shocks, triggering capital flight and increasing default risks.
“Given that economic fundamentals remain the main factor in dollar appreciation, the appropriate response is to allow the exchange rate to adjust, while using monetary policy to keep inflation close to target,” the report said.
The agency also promoted more actions by unelected bureaucrats to use more complex policies it advised.
Simultaneously, the agency also warned against foreign debt.
“Foreign reserves should be used prudently and preserved to deal with potentially worse outflows in the future, in line with the IMF’s Integrated Policy Framework,” the agency said.
“To the extent possible, macroprudential policies should mitigate vulnerabilities from large exposures to foreign-currency-denominated debt.”
Default waves started after 1978, as depreciation became widespread after the IMF’s Second Amendment which came a few years after the collapse of the Bretton Woods system itself from aggressive monetary policy. (Colombo/July17/2024)