Global central bankers need to continue to raise interest rates despite a fragile global economic outlook, the head of a key global financial institution said Thursday.
Speaking ahead of meetings of global central bankers and finance ministers in Washington next week, IMF Managing Director Kristalina Georgieva said there was an urgency to address “a darkened economic outlook.”
“Our world economy is like a ship in choppy waters. We need all the wisdom we can muster to steady the ship and navigate what lies ahead,” she said.
Georgieva said the IMF would downgrade its outlook for the global economy in 2023 when it releases its updated World Economic Outlook next week.
“We will be flagging that the risks of recession are rising,” Georgieva said.
The global economy has become fragmented and is much more fragile, uncertain and volatile, she said.
The IMF estimates that countries that make up one-third of global output will experience two consecutive quarters of contraction this year and next.
Despite the slow growth, global central banks must “stay the course” in their fight to bring 40-year high inflation down, even with the risk they tighten too fast and by too much, Georgieva said.
Even in countries where growth is positive, it can feel like a recession because inflation is eating into real incomes.
The IMF estimates that global outlook will shrink by $4 trillion between now and 2026, the size of the German economy, she said.
“It is more likely to get worse than to get better,” she noted.
“Central banks have to continue in the current environment,” Georgieva said.
“As painful as that may be, it is the right thing to do,” she said.
If monetary policy doesn’t do enough, it can cause high inflation to become entrenched, which will plague the global economy for a long time, she noted.
Fiscal policymakers must resist the temptation to stimulate demand, Georgieva said.
With central banks stepping on the brakes “fiscal policy should not step on the accelerator otherwise we are in for a very rough and dangerous ride,” Georgieva said.
Countries can strengthen their social safety net, she added.
A stronger U.S. dollar
DXY,
raises the risks of capital outflows in emerging and developing economies, the IMF chief said.
The IMF puts the risk of outflows at 40%, she said.
This can cause tremendous problems for countries with large emerging external financing.
The IMF urges countries to maintain exchange rate flexibility and take proactive approaches. And the institution has a new precautionary lending program to help countries navigate risks, she said.
