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The International Monetary Fund said Wednesday that public and private debt stands at a record $226 trillion and that policymakers need to raise interest rates to combat hot inflation.
The largest one-year debt surge since World War II was caused by governments in 2020 rolling out sweeping spending programs to buffer their economies from a collapse in revenue because of the coronavirus crisis.
The debt surge heightens vulnerabilities as financing conditions tighten. The ability of governments to support the recovery and the capacity of the private sector to invest in the medium term is constrained by high debt levels.
Monetary policy is now appropriately shifting focus to rising inflation and inflation expectations even as the pandemic wears on. In the US, the annual consumer price inflation in November was 6.8%, the highest in 39 years. The eurozone inflation rose to 4.1% in October due to a spike in energy prices.
Many central banks are preparing to raise interest rates in order to prevent high inflation, and are also planning to reduce their purchases of government debt, which will increase borrowing costs.
If global interest rates rise faster than expected, the risks will be magnified. The most indebted governments, households, and firms would be put under pressure by a significant tightening of financial conditions. Growth prospects will suffer if the public and private sectors are forced to deleverage at the same time.
The uncertain outlook and heightened vulnerabilities make it crucial for officials to strike the right balance between policy flexibility, agility, and commitment to credible and sustainable medium-term fiscal plans.
It said that a strategy of reducing debt vulnerabilities and facilitating the work of central banks to contain inflation would be beneficial.
Business Insider has an original article.
