The fear of an impending global recession together with a string of other financial crises that could weigh on emerging market economies are rising as central banks across the world synchronously hike interest rates in response to inflation.
This is according to the information contained in a press release available on the website of the World Bank.
Central banks’ tightening of monetary and fiscal policies around the world, though will be instrumental in reducing inflation, could be mutually compounding in tightening financial conditions and fueling the global growth slowdown.
The World Bank believes that the currently expected hawkish interest rate hikes and related policy actions may not be sufficient in bringing global inflation down to pre-pandemic levels, thereby highlighting the need for policies to curb inflation without amplifying recession risks.
Interest rate hikes cannot resolve supply disruptions and labor-market pressures that are feeding inflation. Unless these challenges subside, those interest-rate increases could leave the global core inflation rate at about 5 percent in 2023—nearly double the five-year average before the pandemic, according to the World Bank. This will mean additional raise in interest rate to bring inflation to target and this could slow down global GDP growth if accompanied by financial-market stress, making an additional 2 percentage point hike.
What the international Lender is saying
The World Bank asserts that central banks’ efforts in controlling inflation can be done in a way that will not edge the world toward a recession.
David Malpass, the President of the World Bank Group stated that to achieve low inflation rates, currency stability, and faster growth, policymakers could shift their focus from reducing consumption to boosting production. Policies should seek to generate additional investment and improve productivity and capital allocation, which are critical for growth and poverty reduction.
The bank said:
“Central banks must communicate policy decisions clearly while safeguarding their independence. This could help anchor inflation expectations and reduce the degree of tightening needed. Emerging markets and developing economies should strengthen macroprudential regulations and build foreign-exchange reserves. In advanced economies, central banks should keep in mind the cross-border spillover effects of monetary tightening.”
“Fiscal authorities will need to carefully calibrate the withdrawal of fiscal support measures while ensuring consistency with monetary-policy objectives. The fraction of countries tightening fiscal policies next year is expected to reach its highest level since the early 1990s. This could amplify the effects of monetary policy on growth. Policymakers should also put in place credible medium-term fiscal plans and provide targeted relief to vulnerable households.”
The bank also highlighted some other actions geared toward boosting global supply that policymakers can take in containing inflation. It noted:
“Easing labor-market constraints. Policy measures need to help increase labor-force participation and reduce price pressures. Labor-market policies can facilitate the reallocation of displaced workers.”
“Boosting the global supply of commodities. Global coordination can go a long way in increasing food and energy supply. For energy commodities, policymakers should accelerate the transition to low–carbon energy sources and introduce measures to reduce energy consumption.”
“Strengthening global trade networks. Policymakers should cooperate to alleviate global supply bottlenecks. They should support a rules-based international economic order, one that guards against the threat of protectionism and fragmentation that could further disrupt trade networks.”
This policy recommendation is particularly important for emerging market countries like Nigeria considering that the simultaneous tightening of monetary and fiscal policies being deployed now by many countries may have potential spillover effects and weigh significantly on emerging market and developing economies.