The emergence of the Omicron variant of the novel coronavirus has seen the world economy off to a worst start in the 2022 new year than anticipated, according to the International Monetary Fund (IMF).
As the pandemic approaches the start of its third year, the IMF has said, in an update to its October World Economic Outlook, that inflation is higher and more extensive than predicted due to increasing energy prices and disruptions in supply chains.
“The last two years reaffirm that this crisis and the ongoing recovery is like no other,” Gita Gopinath, IMF’s first deputy managing director and former chief economist, said. “Policymakers must vigilantly monitor a broad swathe of incoming economic data, prepare for contingencies, and be ready to communicate and execute policy changes at short notice.”
The IMF has dampened its expectation for global economic growth, reducing its forecasted figure from 5.9 percent in 2021 to 4.4 percent in 2022, which fell short by half a percentage point compared to what the organisation had projected in October 2021.
The organisation believes the global outlook could become negative as new COVID-19 variants can emerge, extending the pandemic and catalysing renewed economic disruptions.
The inflation outlook also faces uncertainty with disruptions in the supply chain, energy price fluctuation, and wage pressures from local workers.
“Monetary policy is at a critical juncture in most countries,” Gopinath said. “Economies will need to adapt to a global environment of higher interest rates.”
She said governments should cancel extraordinary monetary policy support where inflation is extensive in tandem with a strong recovery, or there is a risk that high inflation becomes ingrained.
“Several central banks have already begun raising interest rates to get ahead of price pressures,” Gopinath said. “It is key to communicate well the policy transition towards a tightening stance to ensure orderly market reaction.”
Nevertheless, she said that where core inflationary pressures stay under control, and recoveries are ongoing, governments can exercise accommodative monetary policy.
The IMF released guidance on interest rates as Australia announced its underlying inflation rate reached the highest point since 2014 at 2.6 percent.
The country also recorded a higher than expected annual consumer price index for the December quarter at 3.5 percent, exceeding the Reserve Bank of Australia’s inflation target of two to three percent.
As a result, economists have formed expectations that the Reserve Bank could begin raising the cash rate currently staying at a record low of 0.1 percent in 2022, which is much earlier than the central bank’s prediction.
