Higher rates would hurt, warns IMF
● The steering committee of the International Monetary Fund (IMF) said this week the global economy is recovering faster than expected from the Covid-19 crisis, but warned that a spike in interest rates could be especially painful for emerging economies.
In its communiqué, the International Monetary & Financial Committee (IMFC) stressed the importance of accelerating the distribution of vaccines globally, and pledged to strengthen international co-operation.
“Elevated financial vulnerabilities could pose risks, should global financial conditions tighten swiftly,” the 24member committee said.
“The crisis may … exacerbate poverty and inequalities, while climate change and other shared challenges are becoming more pressing.”
IMF MD Kristalina Georgieva said a stronger growth outlook for the US has positive spillovers for the world, but some countries struggling to reopen their economies could suffer if faster growth leads to quick increases in interest rates.
At an economic forum during the IMF and World Bank spring meetings, she urged US Federal Reserve chair Jerome Powell to communicate clearly the Fed’s view that inflation remains under control, saying markets have adopted a more “exuberant” view towards inflationary expectations, pushing bond yields higher.
The IMF is forecasting that US inflation will be 2.25% in 2022, only slightly above the Fed’s 2% target. “This is why the very careful approach that Powell is taking to communicating clearly is very helpful — both to hold these expectations in the US from being lifted up and for the rest of the world to be clear around monetary policy in the US.”
Georgieva said she was concerned about the effect of inflation in emerging markets, which might be more inclined to respond through monetary financing, or the “printing” of more money by central banks to directly support government spending.
Such moves are seen as stoking inflation further and eroding purchasing power.
She said efforts to grow trade would help limit inflationary pressures.
During a news conference, Georgieva said all IMFC members had strongly endorsed a $650bn (R9.4-trillion) expansion of the fund’s special drawing rights monetary reserves, especially those representing middle-income countries.
Distribution of the reserves would especially help these countries to bolster financial resources still strained by the pandemic, she said.
Georgieva also said negotiating a new agreement on the IMF’s permanent quota resources will be difficult, but IMF member countries are showing strong engagement in the process, including the US.
“What I took from the meeting are two messages. One, strong support for the IMF at the centre of the global financial safety net, and clear willingness of all members to see us resourced adequately to do our job,” Georgieva said.
The US, which holds a controlling stake in the IMF, opposed any shareholding changes during the Trump administration. The last increase in quotas, which increased the voting shares of China, Brazil and other emerging markets, were agreed in 2010 and implemented in 2016, during the Obama administration.