Central banks should continue to raise interest rates, says the International Monetary Fund (IMF). According to chief economist Pierre-Olivier Gourinchas, this is the only way to bring down the sharp rise in inflation worldwide.
Last year, life worldwide became 8.8 percent more expensive, the IMF reports. This was mainly due to the sky-high energy prices after the Russian invasion of Ukraine. For this year, the fund estimates global inflation at 6.6 percent. Next year inflation should fall to 4.3 percent.
“The fight against inflation is starting to bear fruit, but central banks must continue their efforts,” Gourinchas said in a statement. Earlier this month, ECB President Christine Lagarde already announced that she wants to continue with rate hikes until inflation has fallen towards 2 percent.
The fact that prices are still rising sharply everywhere also has consequences for the global economy as a whole. Gourinchas expects global growth to drop to 2.9 percent this year, compared to 3.4 percent in 2022. Next year, economic growth, as it looks now, will pick up slightly to 3.1 percent.
IMF acknowledges negative effects of rate hikes
Gourinchas calls the expected growth weak, but with these figures the IMF is slightly less gloomy than with the previous forecast in October. This is partly because the energy crisis in Europe has so far not turned out as serious as feared. The fact that China has abandoned its strict corona rules also seems to be helping activity.
The IMF chief economist acknowledges that monetary policy has negative side effects. For example, housing becomes less affordable because borrowing becomes more expensive after an interest rate increase. This makes it less attractive to build new homes.
But Gourinchas emphasizes that the battle against inflation is “far from being won” and that interest rates must therefore rise even further. “Easing too early risks undoing all the progress made so far.”
