Kristalina Georgieva, the Managing Director of the International Monetary Fund (IMF), has warned that the Federal Reserve (Fed)’s next interest rate hike could “throw cold water on nations with high levels of dollar debt” – and their recovery from the COVID-19 pandemic’s economic fallout.
Georgieva was speaking at an event named “Global Economic Outlook” at the World Economic Forum in Davos, where she stated that the Fed was “acting responsibly” in its response to fast-growing inflation.
She said that inflation was “turning into a social and economic concern” in the United States, but expressed concerns about countries with dollar debt and “low-income nations” – claiming that “such nations must act now” if they wanted to avoid the repercussions of a US rate hike.
Many forecasters have predicted the Fed will announce its decision to raise rates sometime next week, with the rate rise itself expected to take place in March.
The IMF chief praised central banks, claiming that they had “prevented a great depression” in their response last year, but stated:
“We need policy flexibility this year; 2022 will be like an obstacle course.”
She predicted that the global recovery would continue in 2022, although she said that “it is losing some momentum.”
But Georgieva conceded that “much more persistent than expected inflation” was now a problem, with “supply falling behind rising demand” and “supply delays caused by COVID-19,” as well as rising food prices caused by fuel price increases among other factors.
However, the picture was different in Brazil, where Paulo Guedes, the Minister of Economy warned that “the beast of inflation is out of the bottle” in the West, adding that inflation in North America and Western Europe “won’t be transitory.”
The IMF and Brazil are currently at loggerheads: last month, Guedes announced that Brazil intended to sack the IMF’s office in the nation after a row about estimates.
At the Davos event, Guedes explained:
“Brazil is possibly the only country that is back exactly where it was before the crisis […], because it did not allow temporary spending to become permanent.”
He claimed that while Brazil had moved faster to cut public spending back to pre-pandemic levels, other “central banks are sleeping at the wheel,” and concluded:
“Inflation will be a problem for the Western world.”
The discussion will likely have turned heads in the crypto world, as well as the world of finance, where tokens such as bitcoin (BTC) have been touted as inflation-proof assets that can perform the same function as commodities like gold.
Christine Lagarde, the President of the European Central Bank (ECB), speaking at the same event, hinted that the EU would look to be less aggressive in its response to inflation than the United States. She stated that the bloc was experiencing “demand that is not excessive,” “unlike the US,” adding that the EU labor market was not “experiencing anything like ‘the great resignation’ – and was thus “unlikely to face the same [inflationary] pressures as the US.”
As such, she hinted, the EU is set to keep its powder dry, claiming that “wages in the euro area are not [spiraling up],” and stating that as “we assume energy prices will stabilize in 2022,” “gradually inflation numbers will decline.”
Also in attendance were finance chiefs from Japan and Indonesia. Sri Mulyani Indrawati, the Indonesian Minister of Finance, noted that the “demand-driven recovery” the country is currently experiencing “is encouraging,” and claimed that the nation was “improving” its “investment climate.”
Haruhiko Kuroda, the Governor of the Bank of Japan (BoJ) claimed that the nation “expect inflation to be around 1% this year,” and would “continue” with a policy of low interest rates, stating:
“We are not afraid of inflation.”