Deniz Kılınç / London, January 13 (HNA) – Central banks’ interest rate hikes aimed at combating inflation could exacerbate a deepening, “dangerous divergence” between advanced and developing economies, International Monetary Fund Managing Director Kristalina Georgieva warned Wednesday.
Georgieva told an event hosted by the Center for Global Development that the Federal Reserve and other central banks knew how to handle inflation, but it could be a delicate balancing act:
“We have learned how to function with the pandemic still around us, we have deployed our scientists to provide protections for our people, we are now more effective with each wave that comes and the restrictions it causes are milder”.
Inflation is not a universal phenomenon, Georgieva underlined, but was a problem in a number of countries and especially the United States. U.S. consumer prices surged 7.0 percent in the 12 months to December, the largest annual increase in nearly four decades.
The Federal Reserve and others have signaled that rate hikes may be imminent in 2022. The “spillover impact on emerging markets …. can add fuel to the fire of divergence,” Georgieva said. Rate hikes in advanced economies raise the cost of borrowing and siphon away investments from emerging markets.
Georgieva said in December the IMF was likely to downgrade global economic growth forecasts of 5.9 percent in 2021 and 4.9 percent this year due to slowing growth in the United States, China, and the Omicron variant; the revision is expected on Jan. 25.
“Yes, the recovery is likely to continue, but against stronger winds,” she said, citing inflation and growing debt levels. Social unrest seen in 2019 was also expected to re-emerge this year, which could pose challenges for policymakers, she added.
The IMF is urging countries to keep building up their defenses against the current pandemic and future ones, she said. It is “hugely important” to ensure a more diversified production of vaccines and reduce the reliance of Africa and other regions on imports.
She said she expects increasing demand for IMF financing this year. The IMF‘s executive board is slated to discuss on Friday a new Resilience and Sustainability Trust lending instrument backed by the Group of 20 countries in October.
“During this crisis, we have provided nearly 170 billion dollars of financing to 90 countries. We did something remarkable which brings the membership together for a historic 650 billion dollars special drawing rights allocation, this is a shot in the arm in the global economy,” she said. Of that, 60 billion dollars of support to the Middle East region, 17 billion dollars in lending, and the rest part of drawing rights.
While Ms. Georgieva was optimistic that the impact of the virus will be less severe, she said there are other concerns and “uncertainty”. The IMF’s priorities for 2022 include helping people and countries deal with the fallout from the pandemic for a third year, Ms. Georgieva said.
“We are stepping into 2022 having already used a great deal of our capacity to protect people and our economy”, she said, adding that the recovery is quite uneven, with different countries in different positions.
Ms. Georgieva explained: “2020 was tough but from a policy standpoint it was somewhat easier, we had universal recommendations, monetary policy accommodation, fiscal policy support to protect the most vulnerable”. That is no longer applicable as countries are at different stages, and there is a concern about “divergence within countries and across countries”, something Ms. Georgieva has been warning about for some time.