Nigeria and other developing nations have been cautioned by the World Bank Group that raising interest rates simultaneously in response to rising inflationary pressure could result in a worldwide recession and a series of financial crises.
The Washington-based bank warned that the currently anticipated trajectory of interest-rate increases and other policy actions might not be enough to bring global inflation back down to levels seen before the pandemic in its latest study, “Risk of Global Recession in 2023 Rises Amid Simultaneous Rate Hikes.”
According to the report, central banks have been rising interest rates this year with a degree of coherence not seen in the previous fifty years. This trend is anticipated to last well into next year.
According to the report, unless supply disruptions and labour-market pressures subsided, those interest-rate increases could leave the global core inflation rate (excluding energy) at about 5 percent in 2023—nearly double the five-year average before the pandemic, the study found.
To cut global inflation to a rate consistent with their targets, central banks might need to raise interest rates by an additional two percentage points, according to the report’s model. If this were accompanied by financial-market stress, global GDP growth would slow to 0.5 per cent in 2023—a 0.4 per cent contraction in per–capita terms that would meet the technical definition of a global recession.
“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.
