Rate hikes spell doom for some economies – World Bank

The World Bank’s chief economist issued a caution regarding the potential adverse effects of interest rate increases on nations grappling with debt. Notably, central banks like the US Federal Reserve and the European Central Banks have initiated interest rate hikes as part of their efforts to curb rising inflation. These central banks have also indicated that interest rates may remain elevated for an extended period.

Indermit Gill, the World Bank’s chief economist, expressed apprehension about the significant slowdown in economic growth caused by the elevated interest rates. As interest rates rise, borrowing becomes more costly, which, in turn, can curtail business investments and consumer spending.

The International Monetary Fund (IMF) recently released an assessment suggesting that, despite various challenges including the ongoing impacts of COVID-19, the war in Ukraine, and rising living costs, the global economy remains resilient. However, it is not experiencing robust growth but is instead characterised as “limping along.”

Gill referred to the 1970s as an illustrative historical period when high-interest rates resulted in the bankruptcy of approximately 24 economies. This historical instance serves as a stark reminder of the potential consequences associated with a protracted period of monetary tightening.

The President of the World Bank, Ajay Banga, acknowledged the moderation of inflation but underscored that interest rates are expected to stay elevated for a longer duration. This situation could introduce complexities into the investment landscape and affect individuals who have grown accustomed to a low-interest rate environment.

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