Simultaneous rate hikes could lead to a ‘chain 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 increases the risk of a recession and a series of financial crises in 2023, the World Bank said in a statement. report.

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

This kind of “degree of synchronicity” between central banks hasn’t been seen in the past five decades, the bank said in a new study released last week. But their efforts do not guarantee that stubbornly high inflation will return to necessary levels.

“Investors expect central banks to raise global monetary policy rates to nearly 4% through 2023, an increase of more than 2 percentage points from their 2021 average,” notes The report. “Unless supply disruptions and labor market pressures ease, these interest rate hikes could leave the global underlying inflation rate (excluding energy) at around 5% in 2023, nearly double the five-year average before the pandemic.

And higher-than-expected inflation would potentially force central banks to hike more than previously thought. “Central banks may need to raise interest rates by another 2 percentage points, depending on the report’s model,” the World Bank said.

And if these rate hikes are accompanied by strains in financial markets, the global economy would suffer a slowdown to 0.5% in 2023. This would represent a contraction of 0.4% per capita and would meet the technical definition of a global recession, according to the World Bank.

“Global growth is slowing sharply, and further slowing is likely as more countries enter recession. My deep concern is that these trends continue, with lasting consequences that are devastating for people in emerging markets and developing economies,” the World Bank Group said. President David Malpass.

To control inflation, the World Bank is proposing to boost production rather than reduce consumption via rate hikes. “Policies should seek to generate additional investment and improve productivity and capital allocation, which are essential for growth and poverty reduction,” Malpass explained.

A global recession seems very likely given several historical indicators, the report adds.

“The world’s three largest economies – the United States, China and the Eurozone – have slowed sharply. Under these circumstances, even a moderate hit to the global economy over the next year could tip it into a recession,” the bank said. “A slowdown – such as the current one – typically requires countercyclical policy to support activity. However, the threat of inflation and limited fiscal space are prompting policymakers in many countries to withdraw policy support even as the global economy is slowing down sharply.”

The problem with this year’s rate hikes is that they’re too synchronized, said Ayhan Kose, the World Bank’s acting vice president for inclusive growth, finance and institutions. And this mutually aggravates the effects of global tightening and accentuates the slowdown in global growth.

“Global coordination can go a long way to increasing food and energy supply. For energy products, policymakers should accelerate the transition to low-carbon energy sources and introduce measures to reduce energy consumption” , advised the World Bank. “Policymakers should cooperate to alleviate bottlenecks in global supply.”

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