The World Bank has said that interest rate hikes by central banks throughout the world might trigger a global recession in 2023.
To combat rising prices, central banks have hiked rates “with a degree of synchrony not witnessed in the last five decades,” according to the report.
Raising interest rates makes borrowing more expensive in an attempt to slow the rate of price increases.
However, it raises the cost of loans, which can limit economic growth.
The World Bank’s warning comes before of monetary policy meetings by the US Federal Reserve and the Bank of England, both of which are likely to raise key interest rates next week.
The World Bank reported on Thursday that the world economy was experiencing its sharpest slump since 1970.
According to the report, “the world’s three major economies – the United States, China, and the eurozone – have been slowing dramatically.”
“Under the circumstances,” it warned, “even a moderate hit to the global economy over the next year might throw it into recession.”
The World Bank also urged central banks to work together and “convey policy choices clearly” in order to “lower the degree of tightening required.”
Inflation, or the rate at which prices rise, has recently reached a 40-year high in the United States and the United Kingdom.
Higher demand was fueled by the relaxation of pandemic restrictions, as well as the war in Ukraine, which drove up energy, fuel, and food prices.
In response, central bank policymakers hiked interest rates to curb household demand.
Large rate rises, on the other hand, raise the probability of a recession by slowing the economy.
Employees of the now-defunct Lehman Brothers offices in New York glance out the window.
Central banks do not usually consult with their counterparts before making policy choices.
They have, however, previously coordinated their efforts to boost the global economy.
A subprime mortgage crisis in the United States triggered a global financial catastrophe in 2007.
Following the failure of the investment bank Lehman Brothers in September 2008, this escalated into a full-fledged crash.
A month later, the Fed, the European Central Bank, and central banks in Canada, Sweden, and Switzerland issued a joint statement.
The “intensification of the financial crisis has amplified the negative risks to growth and consequently has lowered further the upside risks to price stability,” a statement added.