IMF says central bankers must be ‘stubborn’ in fighting inflation
Central bankers must be persistent in fighting broad-based inflation, International Monetary Fund (IMF) chief Kristalina Georgieva said, conceding that many economists were wrong when they predicted last year that inflation would ease.
“Inflation is stubborn, it is more broad-based than we thought it would be,” she said. “And what it means is... we need central bankers to be as stubborn in fighting it as inflation has demonstrably been.”
If fiscal policy and monetary policy worked well, next year might prove less painful, she said at an event with French European Central Bank policymaker Francois Villeroy de Galhau. But if fiscal policy was not targeted sufficiently, it could become the “enemy of monetary policy, fueling inflation,” she said.
Georgieva’s comments came a day ater the US reported an unexpected rise in August consumer prices, with rent and food costs continuing to climb.
US Treasury Secretary Janet Yellen, in an interview with CBS News, said she believed inflation “will come down over time” due to the actions of the Federal Reserve. Yellen said the Biden administration is trying to complement the Fed’s moves.
Georgieva said the surprising rise in inflation was “just one snippet of the uncertainty and difficulties” the global economy faced. Both the COVID-19 pandemic and Russia’s invasion of Ukraine contributed to surging prices and a cost-of-living crisis.
In a blog, the IMF warned that higher oil prices were driving up all consumer prices, which could result in a wage-price spiral if these second-order effects were sustained. Central bankers should respond “firmly,” it said.
When overall inflation is already high, as it is now, wages tend to increase by more in response to an oil-price shock, the IMF said, citing a study of 39 European countries. That showed people were more likely to react to price increases when high inflation was visibly eroding living standards, it said, noting that the larger the second-round effects, the greater the risk of a sustained wage-price spiral.
“If large and sustained, oil price shocks could fuel persistent rises in inflation and inflation expectations, which should be countered by a monetary policy response,” the IMF said, noting that people tended to seek higher compensation for oil price rises. However, even in a high-inflation environment, wages stabilised ater a year rather than continuing to rise at a steady clip, it said.
“To the extent that central banks remain adequately vigilant, current high inflation could still cause higher compensation for the cost of living than usual but need not morph into a sustained increase in inflation,” the IMF said.
The International Monetary Fund said that Bolivia should cut its vast fuel subsidies and instead spend part of those funds on cash transfers for its poorest citizens, as part of a broader fiscal adjustment programme.
The IMF added that Bolivia’s current fuel subsidies are expected to cost the Andean nation about 3.7 per cent of its national gross domestic product in 2022.
Meanwhile Zambia’s international bondholders have criticised the International Monetary Fund’s debt restructuring frameworkas “arbitrary” and for excluding the country’s domestic debt, sources involved in the process have told Reuters.
Zambia has been in default for almost two years and an IMF Debt Sustainability Analysis published last week called for its debt-serviceto-exports ratio to be cut to a 140 per cent “threshold” from 153 per cent quickly and to 84 per cent by 2027.
“Now, all of a sudden, they have an arbitrary 84 per cent number,” said Kevin Daly, head of emerging market debt at Abrdn, who chairs a commitee of bondholders estimated to hold around 45 per cent of Zambia’s $3 billion worth of international market debt.
“How did you arrive at that number? It’s such a different figure than the (140 per cent ) threshold,” he told Reuters, calling on the IMF to meet with bondholders, who have complained of being let out of the loop as the IMF and bilateral creditors worked out a plan.
An IMF spokesperson said it would brief Zambia’s creditors on economic forecasts and policies and denied the 84 per cent debt-toexports ratio target was “arbitrary”.
“The target is firmly grounded in the IMF-WB Debt Sustainability Framework for Low-income Countries,” they said in emailed comments. “It is consistent with a level of external debt-to-exports for country having space to absorb shocks.”
Zambia’s much-delayed debt restructuring is seen by analysts as a test case for what are expected to be a spate of defaults in poorer countries that have borrowed heavily not only in the capital markets but also from countries including China.
David Malpass, president of the World Bank, the IMF’S sister organisation, said last week that “a deep debt reduction of 45 per cent in net present value (NPV) terms... is essential.”
IMF chief Kristalina Georgieva said that if fiscal policy and monetary policy worked well, next year might prove less painful