MNI: Central Banks Won't Win Inflation Fight Until 2025: IMF

Inflation will remain above target for most central banks until 2025 as the Ukraine war and financial-market turmoil make a global soft landing almost impossible, the IMF said Tuesday, calling for tighter policy unless there's a bigger market meltdown.

Medium-term growth prospects are the weakest in decades and in advanced economies the pace of GDP is seen slowing by half this year to 1.3%, according to the Washington-based fund's World Economic Outlook.

In a scenario with a moderate further credit squeeze, global growth would fade to 2.5% this year instead of the base case of 2.8%, which would be the worst slowdown since 2001 outside of the start of Covid and the 2009 global financial crisis.

"Risks to the outlook are heavily skewed to the downside, with the chances of a hard landing having risen sharply," the IMF said, adding that financial sector stress could force central banks "to reconsider their policy paths."

Futures trading shows investors betting the Fed and others will switch this year from rate increases to cuts, a view rejected so far by Chair Jerome Powell and Christine Lagarde at the ECB. For now the best course is attacking inflation with interest rates, in part because bets on Fed cuts “may reflect in part the emergence of liquidity and safety premiums in response to financial market volatility rather than pure policy expectations” the IMF report said.

"Policymakers have a narrow path to walk to improve prospects and minimize risks. Central banks need to remain steady with their tighter anti-inflation stance, but also be ready to adjust and use their full set of policy instruments—including to address financial stability concerns—as developments demand," the report said.

The IMF inflation forecast was boosted 0.4pp this year to 7% and 0.4pp next year to 4.9%. Of the 72 advanced and emerging economies with inflation targets, inflation will exceed target in 91% of nations at a median gap of about 1pp according to the forecast.

Other downside risks include another spike in food prices, sovereign debt distress, even more stubborn core inflation and investment hit by geopolitical fragmentation, the IMF said. Growth over the next five years of 3% is the lowest such projection in the IMF outlook back to 1990, linked to slower labor supply and the maturing of emerging economies like China and South Korea.