The International Monetary Fund has told central banks to “stay the course” in their fight against inflation, despite warning that a third of the global economy will be in recession next year.
In its half-yearly update, the Washington-based IMF said the “worst was yet to come”. It cited a combination of cost of living pressures, Russia’s invasion of Ukraine and a slowdown in China as important factors behind a fresh growth downgrade.
Pierre-Olivier Gourinchas, the IMF’s economic counsellor, said storm clouds were gathering but insisted central banks needed to maintain their “laser focus” on defeating inflation or risk the need for even tougher action later if upward price pressures became embedded.
Gourinchas said the IMF, like central banks, had underestimated the strength of inflationary pressures when they first emerged in 2021, but said there had since been a “rapid and synchronised tightening of monetary conditions, alongside a powerful appreciation of the US dollar against most other currencies”.
The US, the EU and the UK have reported inflation reaching levels not experienced since the early 1980s and Gourinchas said price pressures were proving “quite stubborn”.
He added: “The risk of monetary, fiscal or financial policy mis-calibration has risen sharply at a time when the world economy remains historically fragile and financial markets are showing signs of stress.”
The US central bank, the Federal Reserve, has raised interest rates by 0.75 points at its last three meetings, while the Bank of England has raised borrowing costs from 0.1% to 2.25% since last December.
Gourinchas said the danger of doing too little outweighed the cost of doing too much, but said central banks still needed to be careful. “Over-tightening
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