Central banks need to raise interest rates in the near future to prevent inflation from running away as the war in Ukraine adds to global economic woes just as many countries emerge from the pandemic slow-down.
The International Monetary Fund’s World Economic Outlook forecasts that as high food and fuel prices begin to bite, inflation for 2022 will be 1.8 percentage points higher in advanced economies and 2.8 percentage points higher in emerging and developing countries.
Global economic growth is also forecast to be 1 percentage point lower this year than predicted by the IMF in January. But even those projections could be thrown out the window if the war spreads beyond Ukraine, if economic sanctions on Russia extend to include energy supplies, if worse variants of COVID-19 lead to further lockdowns or if China’s downturn becomes prolonged.
“Inflation has become a clear and present danger for many countries,” IMF economic counsellor and director of research Pierre-Olivier Gourinchas said. “Uncertainty around these projections is considerable, well beyond the usual range.“
Australia’s inflation is forecast to reach 3.9 per cent this year, according to the fund, exceeding the target of 2-3 per cent for underlying inflation set by the Reserve Bank. Australia’s GDP is forecast to reach 4.2 per cent.
The RBA expects underlying inflation to be above 3 per cent for March, according to minutes from its last board meeting published on Tuesday, and noted the likely timing of an interest rate rise had now been brought forward.
The bank is widely expected to begin lifting rates in June, with the four major banks predicting up to five interest rate hikes over the second half of the year.
Tobias Adrian, financial counsellor and director of the IMF’s monetary and capital markets department, said central banks should take decisive action to keep inflation expectations in check.