The World Bank on Inflations and Interest Rate Hikes
The recent 2022 World Bank Annual Meetings devoted substantial time to discussing this year’s global interest rate hike. This happens due to policies from central banks worldwide to combat inflation; they aim to reduce spending, which theoretically would reduce inflation. However, the World Bank’s stance on this goes in the opposite direction: the bank asserts that high interest could spell detrimental results on production, which could become a full recession. At the annual meetings, the bank’s panels made recommendations on tackling this issue without creating new ones in the process.
THE GLOBAL RESPONSE TO INFLATION
Inflation is the definition of the overall global economy in 2022. What began as an economic slump due to the pandemic turned into total inflation with the start of the Ukraine conflict, which prompted a host of other problems. These range from supply chain disruption and high oil prices to fiscal policy mismanagement, resulting in a record-high inflation figure of 11.5% as of October 2022 and a diminutive GDP of merely 2.5%. This has spurred various global central banks into panic mode, resulting in an exponential interest jump over 2022. As a case in point, the US Federal Reserve has already changed its interest rate for the fifth time this year, which is an unprecedented action—now, the interest rate stands at 1.75%. In the usual time, this figure would stand at 0.2 to 0.4%.
A BETTER ALTERNATIVE: STOP CUTTING, START CREATING
Ever since the interest rate hike began, the World Bank has maintained an opposing opinion on this method of combatting inflation. This culminated in September when the bank’s president, David Malpass, voiced his concern that the rising interest rate could result in a falling production level, which, in terms of macroeconomy, could result in a long-term recession. Therefore, at the 2022 annual meetings, the World Bank suggested that global governments allocate a budget to boost production and improve productivity instead of just increasing the interest again. For international bodies and other economic policymakers, coordination to enhance food and security, actions to increase output and decrease logistical bottlenecks, and measures to increase labor costs should be carried out. With these, production has the chance to rise, and economic growth would follow suit, thus naturally reducing inflation without the risk of recession.
ROLES BUSINESSES MUST PLAY
Though the World Bank’s recommendations were mainly for the public sector, their lesson—spur production to boost economic growth—can be applied universally. The private sector does have a part to play in pulling our world out of this crisis. As the cost of capital is still high, businesses can focus on maximizing their current outputs with the resource they currently have while shelving plans to venture into big megaprojects for the time being. Some ways to do this are solving bottlenecks (instead of doing R&D on new products) and increasing worker retention (instead of hiring more). With firms taking the initiative and governments starting to heed the World Bank’s recommendations and change their monetary policies, the result could be tremendous. When the interest rate is favorable again, companies regain the option to expand while retaining the strength and operational excellence developed during this time of austerity.
Inflation is a problem that affects everyone; therefore, its solutions must come from every sector, not just the public or the private sector alone. With concerted initiatives across the board, humanity endures.
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