This Feared rise in interest rates It shouldn’t take longer than necessary. this is the message of confidence International Monetary Fund providing (IMF) return to pre-pandemic interest rates after controlling inflation. The forecast could calm the alarm situation in the real estate market, which fears a deep activity crisis in Spain, and strengthen the debate about economic policies to face in current times of financial uncertainty. Specifically, the IMF believes that real interest rates, which reduce inflation from the nominal rate, will return to pre-pandemic levels once inflation is under control. What is impossible to solve is the period in which this price control will be achieved.
The institution evaluates the possibility that the recent increases in real interest rates may be “temporary” and predicts that central banks of developed countries will “loosen real interest rates” when inflation is no longer a threat. Money Politics‘ and bring real interest rates to pre-pandemic levels. Markus Brunnermeier, Edward S. Sanford Professor of Economics at Princeton University, said on the IMF website that banks should adapt their strategies given the current state of the economy, and that “the approach” and “only that governments should monetize excess debt.” If they promise not to give in to his will, this forces the authorities to cut spending or increase taxes, or both, i.e., implement measures of fiscal consolidation.
Conservative projections of future demographic and productivity trends in the case of large emerging economies, gradual convergence towards real interest rates in advanced economies. In this sense, the IMF warns that adjustment to pre-pandemic levels will depend on whether alternative scenarios of consistently higher debt and public deficits or financial fragmentation occur. For the fund, this means that problems with the “effective lower limit” of interest rates and “prolonged low (interest rates)” will likely resurface. “Through active management of central bank balance sheets and forward steering, non-traditional policies can become standard stabilization instruments even in emerging markets,” says the IMF. An international risk is that the current global economic situation also points to an increasing fragmentation of foreign direct investment. Capital flows are increasingly concentrated in geopolitically strategic countries. As a result, several emerging market and developing countries are highly vulnerable to resettlement, and differences between countries may increase in the coming years.
Towards the natural rate of interest
The natural rate of interest—the real rate of interest that neither stimulates nor shrinks the economy—is important for both monetary and fiscal policy; It is the reference level for measuring the stance of monetary policy and an important determinant of the sustainability of public debt. IMF analysis shows that interest rates in advanced economies may return to pre-pandemic levels after the current period of inflation has passed. How close interest rates will approach these levels will depend on whether alternative scenarios of consistently higher public debt and deficits or fiscal fragmentation occur.
For financial institution Discussions on the “appropriate level of inflation targeting” They may also resurface among economists as countries weigh the social cost of higher inflation against the constraints of ineffective stability by the effective lower bound. On the other hand, permanently falling real interest rates also increase the fiscal space and enable fiscal authorities to take a more active role in stabilizing the economy if fiscal sustainability is achieved. In this case, it is of great importance for the institution to clarify the scope and responsibilities of the financial and monetary authorities so that the credibility of the central banks is not damaged in the long run. In this regard, the IMF pointed out last week that governments’ fiscal policy design could help central banks fight inflation and therefore limit the need to raise interest rates while better protecting the most vulnerable groups. “When central banks act alone without the support of fiscal policy, they must raise interest rates significantly to combat inflation,” Vitor Gaspar, Director of the IMF’s Financial Affairs Department, said in an article. Europa Press says it “allows for less rate hikes to contain inflation.”
The IMF argues that while monetary policy is “in the driver’s seat in tackling inflation,” fiscal policy can help design a well-targeted fiscal adjustment to support the central bank in its pursuit of price stability, while also protecting the vulnerable. crisis due to the increase in the cost of living.