IMF Cautions on Global Growth Threats from Persistent Inflation
The International Monetary Fund (IMF) has issued a warning that global growth is at risk due to elevated inflation, necessitating higher interest rates. The IMF has maintained its 2024 growth projection at 3.2 percent and slightly increased its 2025 growth forecast by 0.1 percent to 3.3 percent.
“The risk of elevated inflation has raised the prospects of higher-for-even-longer interest rates, which in turn increases external, fiscal, and financial risks,” the IMF stated in its July update to the World Economic Output report.
Persistently high interest rates could further raise borrowing costs and affect financial stability unless fiscal improvements counteract higher real rates amidst lower potential growth. Global inflation surged following significant money printing and increased government spending during the Coronavirus pandemic, particularly in the US, UK, Europe, and other regions.
The Federal Reserve delayed rate hikes, attributing inflation to supply shocks and geopolitical factors such as the conflict involving Vladimir Putin, a narrative also supported by the IMF. Western academics and the IMF refer to such actions—typically executed by unelected officials—as ‘policy support’ to maintain ‘potential output.’
By 2022, inflation in advanced Western nations reached levels not seen since the early 1980s, with rising commodity prices causing widespread economic disruptions and hunger in countries with depreciating currencies. The report noted that price increases continue in many nations, partly due to delayed wage growth in services.
However, a gradual cooling of labor markets and an expected decline in energy prices are anticipated to bring headline inflation back to target by the end of 2025. “Inflation is expected to remain higher in emerging market and developing economies (and to drop more slowly) than in advanced economies,” the report highlighted.
The IMF pointed out that thanks to falling energy prices, inflation is already nearing pre-pandemic levels for the median emerging market and developing economy. Advanced economies are taking measures to maintain monetary stability, with the US postponing rate cuts due to unexpectedly persistent inflation. Relatively stable emerging markets with reserve-collecting central banks have also delayed rate cuts.
“Several central banks in emerging market economies remain cautious about cutting rates due to external risks from changes in interest rate differentials and associated currency depreciation against the dollar,” the report indicated. Prolonged dollar appreciation, resulting from tighter US monetary policy, could disrupt capital flows and impede planned monetary policy easing, adversely impacting growth.
The IMF advocated for monetary easing for reserve-collecting central banks, focusing on domestic anchors rather than maintaining high interest rates to prevent destabilizing external factors and increasing default risks. “Given that economic fundamentals remain the main factor in dollar appreciation, the appropriate response is to allow the exchange rate to adjust while using monetary policy to keep inflation close to target,” the report advised.
The IMF also warned against excessive reliance on foreign debt. “Foreign reserves should be used prudently and preserved to handle potentially worse outflows in the future, in line with the IMF’s Integrated Policy Framework,” the report stated. “Macroprudential policies should mitigate vulnerabilities from large exposures to foreign-currency-denominated debt.”
Classical economists have criticized such policies, arguing that economic shocks and unemployment result from initial money printing that distorts economies. Friedrich Hayek, in his Nobel prize-winning speech in 1974, stated, “The continuous injection of additional amounts of money creates temporary demand, drawing labor and resources into employments that can only last as long as the money supply increases.”
Hayek emphasized that such policies lead to unsustainable employment distributions, ultimately resulting in substantial unemployment as inflation ceases to accelerate. Sovereign default waves in Latin American nations began after 1978 when the US tightened policy under Fed Chief Paul Volcker, and countries failed to hike rates to slow domestic credit.