Saturday, February 24

The IMF backtracks and warns that raising rates “too much” will cause a “prolonged recession”

Kristalina Georgieva, director of the International Monetary Fund (IMF), has reversed this Thursday regarding the “aggressiveness” that her number two, Gita Gopinath, asked central banks in August to fight inflation. The institution now admits that inflation has become “more persistent”, that the risk of recession is increasing and that, even with economic growth, price increases will feel like a crisis due to the blow to wages. Therefore, she warns that the key is to “avoid much greater pain.”

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As Kristalina Georgieva told central banks at a conference at Georgetown University in Washington DC, raising interest rates “too much” will cause a “prolonged recession.”

“Tightening monetary policy too much and too quickly, and doing so in a synchronized manner in all countries, could push many economies into a prolonged recession,” stressed the IMF director, who explained that “higher interest rates are hurting domestic demand, including in real estate markets. But inflation has remained stubbornly high and widespread, which means central banks must continue to respond.”

“It is the right thing to do: act decisively even when the economy inevitably slows down,” he continued. But he has admitted that “this is not easy, and it will not be without pain in the short term”, to top it off by recommending that “the key is to avoid much greater and more lasting pain for everyone”.

The risks Kristalina Georgieva poses go beyond the consequences of a “protracted recession,” with rising unemployment the biggest threat to working families. The main risk is that, after three years of “shock after shock after shock”, inflation now means that “any country can lose its way”.

“More likely to get worse than better”

“First, the COVID. Then Russia’s invasion of Ukraine. And climatic disasters on all continents. These impacts have inflicted immeasurable damage on people’s lives. Their combined impact is driving a global rise in prices, especially for food and energy, causing a cost of living crisis. And dealing with them is made more difficult by geopolitical fragmentation”, she reflected.

For this reason, he proposes to “stabilize the world economy”. As he has advanced, at the IMF “we expect a loss of global activity of around 4 trillion dollars between now and 2026. This is the size of the German economy.”

“And it’s more likely to get worse than better,” he added. “Uncertainty remains extremely high in the context of war and the pandemic. And there could be even more economic shocks. The risks to financial stability are increasing”, Kristalina Georgieva has listed, in the latter case in reference to the over-indebtedness that many states bear after efforts in public spending due to COVID.

Among the solutions proposed by the IMF, in addition to warning central banks, it includes “a responsible fiscal policy, which protects the vulnerable, without adding fuel to inflation [es decir, sin bajadas de impuestos generalizadas, sino dirigidas a las familias y empresas que las necesitan]”. And, finally, he has called for “greater global cooperation.”