IMF Urges Central Banks to Not Prolong Agony of Inflation

International Monetary Fund (IMF) has said that global central banks might be enticed to cut interest rates ahead of monetary tightening to fight inflation. IMF’s Research Director Pierre-Olivier Gourinchas has said that this would be a mistake and would only lengthen the effects of inflation.

“And so central banks might be a little bit antsy about this. And this is why when we look at the next year or so this is really going to be an environment that will test the mettle for central banks around the world, Will they be really ready to stay the course and keep their eyes on inflation and bringing it down?” Gourinchas said.

Gourinchas also mentions that rate hikes similar to the U.S. Federal Reserve’s, are raising costs of borrowing and cushioning the demand. This procedure needs to continue until inflation areas are “within sight” of the central bank’s aim of an estimated 2% annually, adds Gourinchas.

Last Tuesday, the IMF lowered its global economic growth outlook as it says that monetary tightening, the Russia – Ukraine war, and China’s COVID-19 lockdowns, can potentially drive the global economy to the brink of a recession in the next months.

Gourinchas says that if central banks begin easing their policy before inflation is dealt with, there can be a repeat of the 1980s when the Fed, led by Paul Volcker, prematurely backed off monetary tightening but was forced to enforce even higher rate hikes later in the year to combat inflation.

Source: Inquirer