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Full impact

International Monetary Fund chief Kristalina Georgieva last week warned countries have yet to see the full impact of tightening financial conditions and that central banks still have some way to go in the battle with inflation.

Global growth is expected to slow further this year, as central banks, including the US Federal Reserve have raised interest rates to cool surging prices.

While sectors like housing have been reeling in the United States, the labor market remains strong with low joblessness.

“As long as people are employed, even if prices are high, consumers spend… But we all know that the impact of tightening financial conditions is yet to bite, in terms of unemployment,” Georgieva told reports in a briefing of the world economy.

“Inflation remains stubborn, and in that sense, the job of central banks is not yet done,” she said.

This suggests central banks may need to continue raising interest rates, walking a fine line between lowering demand and avoiding tipping economies into recession. This means governments need to watch closely how tightening financial conditions affect the labor market and possibly translate into “more tensions between employers and workers.”

Additionally, while tighter financial conditions will have a dramatic impact on countries with high debt levels, she said the IMF does not see a “systemic debt crisis on the horizon.”

The IMF chief’s warning that the world is yet to feel the full impact of tightening financial conditions is worrying for countries like the Philippines, where people are hoping that what we are experiencing now, where prices of goods are skyrocketing, is already the worst of it and we are reduced to hoping that our economy and the cost of living is somehow on its way back to some sort of normal.

If this is not yet the full impact, then our short term outlook suddenly becomes quite frightening. This is a matter that we have no choice but to entrust with our central bank officials in the hope that they know what they are doing so our countrymen do not suffer so much from the effects of the prevailing financial conditions.*

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January 2023
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