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Georgieva, on the need to cut inflation.- Fiscal measures shouldn’t undermine monetary policy or the pain will be prolonged

The aftermath of the pandemic, Russia’s war on Ukraine, and climate change are the key contributing factors in the global rising cost of living and food crisis. The IMF warns that there is a one-in-four chance that global growth could drop to a historic low of 2% next year.

Latest Monday Kristalina Georgieve (IMF Managing Director) had already advanced some preliminar quantifications on its not precisely rosy forecast: “We have calculated that about one-third equivalent of the world economy would have at least two consecutive quarters of negative growth this year, next year, and that the total amount that would be wiped out by the slowdown of the world economy is going to be between now and 2026, four trillion dollars. This is the size of Germany, GDP gone.” (click on the link I provide below for the projections advanced by Georgieva and World Bank Group’s President, David Malpass last Monday)

In this context IMF Managing Director stressed that fiscal policy and monetary policy (the rise in interest rates) must not work separately.

Inflation is a tax that cannot fester for longer

“I am convinced that if we do not restore price stability, we will undermine prospects for growth. We would create more uncertainty for investors, and we would put consumers in a very difficult spot. You all know inflation is a tax on the lower income parts of our society and therefore cannot be allowed to fester for longer,” Georgieva pointed today.

Fiscal measures need to be be well targeted and temporary

“Fiscal policy should not undermine monetary policy because if it does it. Then the task of monetary policy becomes only harder, and it translates into the necessity for even further increase of rates and tightening financial conditions. So don’t prolong the pain. Make sure that actions are coherent and consistent. And I do believe that it is correct to be led by evidence. So if the evidence is that there has to be a recalibration, it is right for governments to do so,” she warned.

“The obvious conclusion is that policy measures need to be well targeted and they need to be temporary. Steer away from across the board fiscal support that is neither effective nor affordable. If we are to help, people and fight inflation, we must ensure that fiscal and monetary policy go hand in hand. You heard me saying that multiple times. I’m going to say it again because it is so important for this message to penetrate when monetary policy puts a foot on the brakes. Fiscal policy should not step on the accelerator because if it does, we are for a very dangerous rate,” Georgieva said.

Image over the headline.- Kristalina georgieva during the press conference held today. Caption from the IMF video of the press conference provided to the media for free.

Related Eastwind links:

IMF estimates risk of worldwide economic loss at $4 trillion dollars from 2022 to 2026 by slowdown

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