The World Bank Group has cautioned Nigeria and other emerging nations that raising interest rates at the same time in response to rising inflationary pressures might lead to a worldwide recession and a series of financial crises.
The Washington-based bank warned in a new report titled “Risk of Global Recession in 2023 Rises Amid Simultaneous Rate Hikes” that the present track of interest-rate hikes and other policy steps may not be enough to bring global inflation back down to pre-pandemic levels.
According to the research, central banks throughout the world have been rising interest rates with unprecedented synchrony this year, a pattern that is expected to continue far into next year. Investors anticipate that central banks would boost global monetary policy rates to about 4% by 2023, a rise of more than two percentage points above their 2021 average.
According to the analysis, unless supply disruptions and labour-market pressures abate, interest-rate rises may leave global core inflation (excluding energy) at over 5% in 2023, roughly double the five-year average before the epidemic.
According to the report’s estimate, central banks may need to hike interest rates by another two percentage points to reduce global inflation to a pace commensurate with their aims. If this is followed by financial-market stress, global GDP growth would drop to 0.5% in 2023, representing a 0.4% decrease in per-capita terms.
“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 achieve low inflation rates, currency stability and faster growth, policymakers could shift their focus from reducing consumption to boosting production. Policies should seek to generate additional investment and improve productivity and capital allocation, which are critical for growth and poverty reduction.”
The study highlighted the unusually fraught circumstances under which central banks were fighting inflation today. Several historical indicators of global recessions were already flashing warnings, the report noted.
It noted that the global economy was now in its steepest slowdown following a post-recession recovery since 1970.
In its recommendation, the World Bank said central banks should persist in their efforts to control inflation—and it could be done without touching off a global recession, the study found. But it would require concerted action by a variety of policymakers, the World Bank said.