The head of the International Monetary Fund has warned that victory in the fight against inflation could spell trouble for financial markets by forcing central banks to keep interest rates high until 2025.
In a Guardian interview before next week’s IMF annual meeting in Marrakech, Kristalina Georgieva said there was a risk of borrowing costs staying high for a protracted period, with knock-on effects for asset prices.
The fund’s managing director said there had been progress in the struggle to bring inflation down but some countries had done better than others.
“It’s not done, and that puts a question mark over the longevity of high interest rates – certainly through 2024 and maybe all the way to 2025. So you have weak growth prospects and tighter financial conditions,” said Georgieva.
Bond yields, a measure of the cost of servicing government debt, have soared in developed-country markets in the past week as investors have realised that official interest rates could remain higher for longer.
Georgieva said there had been a “pile-up” of asset valuations before it dawned on businesses that it would take time for interest rates to start coming down. “So now inflation expectations have moved up, is there a risk of a sharp repricing and then financial stability considerations?”
She has just completed the fourth year of her five-year term as IMF managing director, a period she said had been dominated by two “unthinkable” events: the Covid 19 pandemic and Russia’s invasion of Ukraine. Both, she said, had left their mark, but the IMF had responded “swiftly and on the necessary scale” to each of them.
“The world economy is recovering but it is slow and uneven. There is still quite a lot of scarring from Covid and the war. The US is the only economy that has returned to its pre-pandemic trend. The eurozone is 2% below, emerging markets are 4-5% below and low income countries are 6%+ below,” said Georgieva.
“So the scarring is there and when you look at the growth prospects they are weak. In the next five years we expect an average of 3% a year compared with 3.8% a year in the five years before Covid. We have wounds to heal and growth is simply not enough to do it and bring more prosperity to people.”
The full-scale military invasion of Ukraine began just as the global economy was starting to recover from the pandemic. Georgieva described it as a “big black cloud hanging over the world economy”.
While the war had been devastating for the people of Ukraine, there had been spillover effects into other countries such as Germany, the worst performing of the big G7 economies.
“Look at the impacts already: defence expenditure up. We had a peace dividend, but we don’t have it any more. It is gone, understandably, because we can no longer take peace for granted,” said Georgieva.
“Think about how much more could have been done for infrastructure, education and international development if the Russians didn’t invade Ukraine and destroy our sense of security. As long as it goes we don’t know whether there will be a spillover that will be particularly damaging.”
Next week’s annual meetings of the IMF and the World Bank will take place as planned in Marrakech despite the devastating earthquake that struck Morocco last month, killing almost 3,000 people.
Georgieva said she had four big objectives for the meeting: to put in place the right policies to bring down inflation and increase growth; to expand the IMF’s financial fire power so that it can help countries in economic trouble; to persuade wealthy countries to subsidise zero-interest rate loans to low-income nations; and to make more rapid progress in delivering debt relief.
“We do need to bring the fight against inflation to victory. Inflation is bad for growth but it is also harmful for the poorer parts of the population,” she said.
“Countries have to be more ambitious in pressing for structural reforms to energise growth, and that means more focus on productivity enhancements and the green transition to create new dynamism.”
Georgieva said the IMF had lent $160bn (£132bn) to help countries affected by the pandemic and a further $160bn in the aftermath of the invasion of Ukraine. She added that the IMF now needed richer countries to respond to a more “shock-prone world” by providing the resources to increase the size of the fund’s safety net. “Every shock hits the most vulnerable countries the most. They don’t have reserves. For them we are the insurer,” Georgieva said.
The IMF chief said progress was being made with the Common Framework – an initiative launched by the G20 group of large developed and developing economies in 2020 designed to speed up debt relief, which has faced criticism for the time it has taken to deliver help to a small number of heavily indebted countries.
“We are moving in the right direction although not as fast as I would like,” she said. “Debt is a serious problem for the countries that are affected but it is not yet and we don’t see it becoming a systemic debt crisis problem.
“Countries that are in debt distress are still a relatively manageable number. We are trying to help countries in near debt distress from sliding deeper into financial problems.”
