Global interest rate hikes are ‘yet to bite,’ says IMF head

The world economy is still in a sticky spot, according to the head of the International Monetary Fund, despite cautious optimism among economists and business leaders that slowing inflation means the worst of last year’s crises may be over.

Kristalina Georgieva, managing director of the IMF, said on Friday that conditions in the world economy were “less bad” than feared a few months ago, but further pain could be on the way.

Addressing a panel at the World Economic Forum in Davos, Switzerland, Georgieva said interest rate hikes by the world’s major economies had “yet to bite,” and could increase unemployment — a situation that cash-strapped governments could find hard to respond to adequately.

“It is very different for a consumer to have [a] cost-of-living crisis and a job, than to have [a] cost-of-living crisis and no job,” she said.

Last year, most of the world’s central banks, including the US Federal Reserve and European Central Bank, started aggressively hiking interest rates in an attempt to control runaway inflation triggered, in large part, by Russia’s invasion of Ukraine that sent energy prices soaring.

ECB President Christine Lagarde vowed, during Friday’s discussion, to “stay the course” in bumping up the cost of borrowing to bring inflation down to the central bank’s 2% target.

For its part, the Fed also remains laser-focused on reaching the 2% target. Policy will have to remain restrictive for “some time” to come, Fed Vice Chair Lael Brainard said on Thursday. “We are determined to stay the course.”

And both the IMF and ECB heads cautioned that China’s reopening of its economy following the abandonment of its strict zero-Covid policy threatened to push up prices of commodities, including oil and natural gas, as demand picks up later this year.

An employee scans a customer's food items at the check-out desk inside a Caprabo SA supermarket in Barcelona, Spain, on Friday, Nov. 4, 2022. Soaring prices continue to weigh on activity in the euro zones fourth-biggest economy.

Inflation is finally falling. But the days when prices rose just 2% may never return

“The amount of LNG [liquefied natural gas] that [China] will be buying from the rest of the world will be higher than we have seen… there will be more inflationary pressure coming out of that added demand in commodities, and energy in particular,” Lagarde said.

That could weigh on global growth, which the IMF forecast in October would slump to 2.7% this year, down from 3.2% in 2022.

Even so, economists and business leaders have signaled in recent weeks that the world economy may be at a hopeful turning point.

Inflation in the United States and Europe is trending downwards, supply chain bottlenecks are easing, and the risk of energy rationing in Europe this winter has been averted. China’s reopening has helped buoy markets in Asia.

Lagarde said that economies are moving from “defense mode…to competition mode.”

“So something must be getting better,” she added.