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Simultaneous rate hikes could lead to a 'string of financial crises,' warns World Bank

Kitco News

(Kitco News) The global fight against inflation in the form of aggressive and simultaneous rate hikes by central banks is raising the risk of a recession and a string of financial crises in 2023, the World Bank said in a report.

The global trend of oversized interest rate hikes by many central banks is a risk to the world economy.

This kind of "a degree of synchronicity" between central banks has not been witnessed over the past five decades, said the bank in a new study published last week. But their efforts don't guarantee that the stubbornly high inflation will return to the levels needed.

"Investors expect central banks to raise global monetary-policy rates to almost 4 percent through 2023—an increase of more than 2 percentage points over their 2021 average," the report noted. "Unless supply disruptions and labor-market pressures subside, those interest-rate increases could leave the global core inflation rate (excluding energy) at about 5 percent in 2023—nearly double the five-year average before the pandemic."

And the higher-than-expected inflation would potentially force the central banks to hike more than previously thought. "Central banks may need to raise interest rates by an additional 2 percentage points, according to the report's model," the World Bank said.

And if these rate hikes are met with financial-market stress, the global economy would suffer by slowing to 0.5 percent in 2023. This would be a 0.4% contraction in per–capita terms and would meet the technical definition of a global recession, according to the World Bank.

"Global growth is slowing sharply, with further slowing likely as more countries fall into recession. My deep concern is that these trends will persist, with long-lasting consequences that are devastating for people in emerging market and developing economies," said World Bank Group President David Malpass.

To get inflation under control, the World Bank suggests boosting production rather than reducing consumption via rate hikes. "Policies should seek to generate additional investment and improve productivity and capital allocation, which are critical for growth and poverty reduction," Malpass explained.

Global recession looks very likely considering several historical indicators, the report added.

"The world's three largest economies—the United States, China, and the euro area—have been slowing sharply. Under the circumstances, even a moderate hit to the global economy over the next year could tip it into recession," the bank said. "A slowdown—such that the one now underway—typically calls for countercyclical policy to support activity. However, the threat of inflation and limited fiscal space are spurring policymakers in many countries to withdraw policy support even as the global economy slows sharply."

The problem with this year's rate hikes is that they are all too synchronized, said Ayhan Kose, the World Bank's Acting Vice President for Equitable Growth, Finance, and Institutions. And that mutually compounds the effects of global tightening and steepens the global growth slowdown.

"Global coordination can go a long way in increasing food and energy supply. For energy commodities, policymakers should accelerate the transition to low–carbon energy sources and introduce measures to reduce energy consumption," the World Bank advised. "Policymakers should cooperate to alleviate global supply bottlenecks."

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