The International Monetary Fund (IMF) has released a blog post stating that real interest rates in advanced economies are likely to return to pre-pandemic levels once inflation has been controlled. The post also suggests that a transition to a “cleaner economy in a budget-neutral way” could result in lower rates in the medium term. The return to pre-pandemic levels will coincide with the easing of monetary policies in the respective countries. Central banks from advanced economies have raised benchmark rates to control inflation, and this has sparked fears of a global recession. However, the authors of the IMF post argue that the recent increase in interest rates are likely to be temporary, and the transition to a cleaner economy could bring real interest rates down globally.
Transitioning to a Cleaner Economy
The IMF blog post suggests that transitioning to a cleaner economy in a budget-neutral way could push global natural rates lower in the medium term. This is because higher energy prices, reflecting a combination of taxes and regulations, would bring down the marginal productivity of capital. However, subsidizing and deficit-financing of public investment in green infrastructure could potentially offset and even reverse this result. Therefore, a shift to a cleaner economy using the right policies could result in the lowering of global natural rates.
The post also points out that deglobalization forces could drive up natural rates in advanced economies and down in emerging markets as a result of trade and financial fragmentation. However, this trend could be arrested through increasing public investment in green infrastructure and subsidies.
The return of real interest rates to pre-pandemic levels will coincide with the easing of monetary policies in the respective countries. As central banks in advanced economies raise benchmark rates to control inflation, there have been concerns that this could lead to a global recession. However, the IMF blog predicts that the recent increases in real interest rates are likely to be temporary.
According to the blog post, inflation control is a key factor in bringing interest rates down to pre-pandemic levels. The IMF has urged policymakers to ensure that their policies address the challenges of inflation spiraling out of control. This could be achieved by lowering interest rates to spur consumption in the economy and stimulate supply. Once how this is done and inflation brought under control, real interest rates are expected to fall to pre-pandemic levels.
Impact on the Global Economy
The IMF blog post suggests that the recent interest rate hikes will have a temporary impact on the global economy. With the right policies, a shift to a cleaner economy could potentially bring real interest rates down globally. This will be positive for businesses and consumers that rely on borrowing to invest in growth or consumption. Lower rates will make borrowing cheaper, which will spur consumption and stimulate investment.
Deglobalization, however, could result in higher natural rates in advanced economies and lower rates in emerging markets. While this may be challenging for emerging markets, policymakers in advanced economies could alleviate the effects of such fragmentation through public investment in green infrastructure and subsidies.
The IMF blog post highlights the impact of interest rates on the global economy and suggests that returning interest rates to pre-pandemic levels could be achieved through inflation control. A shift to a cleaner economy, complemented with the right policies, could potentially bring down real interest rates globally. Policymakers in advanced economies should ensure that their policies address the challenge of inflation, and the effect of trade and financial fragmentation on natural rates in emerging markets economies. While interest rate hikes could impact the global economy in the short term, the return to pre-pandemic levels is expected in the medium term.