The world must “buckle up” for a lengthy period of higher interest rates to prevent inflation gripping the global economy, the head of the International Monetary Fund said yesterday.
Kristalina Georgieva, speaking at the Future Investment Initiative conference in Saudi Arabia, said it was necessary for borrowing costs to stay at their highest level since just before the 2008 financial crisis.
Inflation was “not going down fast enough”, Georgieva, 70, said. “Our call to everybody is: buckle up. Make sure that you understand [higher] interest rates are here to stay.”
She also said that the war between Israel and Hamas, and the prospect of the conflict drawing in the rest of the Middle East, had amplified the damaging economic effects of Russia’s invasion of Ukraine. Greater political tensions had created an environment in which “growth is slow”, she said, and would remain “slow for years to come”.
Georgieva said higher interest rates were “throwing more cold water on growth”. In forecasts released this month, the fund said that global growth would be “well below the historical average” at 3 per cent this year and 2.9 per cent next year. Britain’s economy was projected to expand by 0.5 per cent and 0.6 per cent, respectively, well below the country’s long-term rate. The German economy is expected to shrink by 0.5 per cent this year, the worst performance in the G7.
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The Bank of England is expected to keep its base interest rate at 5.25 per cent, a 15-year high, at its next meeting.
The European Central Bank’s governing council is forecast to keep borrowing costs unchanged at 4 per cent today, a record high since the single currency monetary authority was set up more than 20 years ago.
A mixture of central banks signalling that interest rates will stay high, fears about government borrowing and inflation risks have driven a steep rise in global bond yields. This week the yield on the 30-year UK gilt briefly touched its highest point since 1998.
Inflation has dropped from multi-decade peaks in Britain, the eurozone and the United States, easing the pressure on central banks to raise rates. Experts believe that central banks will leave interest rates at their peak for about a year.
