Home » Taming inflation should be the first priority for policymakers, says the IMF

Taming inflation should be the first priority for policymakers, says the IMF


The International Monetary Fund (IMF) is forecasting a 3,2% world GDP growth for 2022 in its July World Economic Outlook. That’s a 0.4 %age point lower than in the April 2022 edition. With war in Ukraine, escalation of the property sector crisis in China, renewed COVID-19 outbreaks, the forecasted growth can even decline to 2,6% warned the IMF.

A tentative recovery in 2021 has been followed by increasingly gloomy developments in 2022 as risks began to materialize, highlighted by the IMF in its latest World economic outlook.  The baseline forecast is for growth to slow from 6.1 % last year to 3.2% in 2022. 

The risks to the outlook are overwhelmingly tilted to the downside, said the IMF. “The war in Ukraine could lead to a sudden stop of European gas imports from Russia; inflation could be harder to bring down than anticipated either if labor markets  are tighter than expected or inflation expectations unanchor; tighter global financial conditions could induce debt distress in emerging market and developing economies; renewed COVID-19 outbreaks and lockdowns as well as a further escalation of the property sector crisis might further suppress Chinese growth; and geopolitical fragmentation could impede global trade and cooperation. A plausible alternative scenario in which risks materialize, inflation rises further, and global growth declines to about 2.6 % and 2.0 % in 2022 and 2023, respectively, would put growth in the bottom 10 % of outcomes since 1970“.

The war’s humanitarian cost is rising, with 9 million people having fled Ukraine since the Russian invasion started and continuing loss of life and destruction of physical capital. Since April 2022, major advanced economies have placed additional financial sanctions on Russia, and the European Union agreed on embargoes on imports of coal starting in August 2022 and on Russian seaborne oil starting in 2023.

The worsening crisis in China’s property sector is also dragging down sales and real estate investment. “The slowdown in China has global consequences: lockdowns added to global supply chain disruptions and the decline in domestic spending are reducing demand for goods and services from China’s trade partners”, said the report. .

Taming Inflation

With increasing prices continuing to squeeze living standards worldwide, taming inflation should be the first priority for policymakers, argued the Bretton Woods institution . “Tighter monetary policy will inevitably have real economic costs, but delay will only exacerbate them.Targeted fiscal support can help cushion the impact on the most vulnerable, but with government budgets stretched by the pandemic and the need for a disinflationary overall macroeconomic policy stance, such policies will need to be offset by increased taxes or lower government spending”, said the IMF. 

In the United States, the consumer price index rose by 9.1 % in June, compared with a year earlier, and it also rose by 9.1 % in the United Kingdom in May—the highest inflation rates in these two countries in 40 years. In the euro area, inflation in June reached 8.6 %, its highest level since the inception of the monetary union. Equally concerning, in emerging markets and developing economies, second-quarter inflation is estimated to have been 9.8 %. 

It is indicated that the central banks of major advanced economies are withdrawing monetary support more assertively and raising policy interest rates faster than expected while Central banks in several emerging market and developing economies have raised interest rates more aggressively than during past advanced economy tightening cycles.
“Tighter monetary conditions will also have an effect on the financial stability, requiring judicious use of macroprudential tools and making reforms to debt resolution frameworks all the more necessary”, said the fund.