The World Bank has warned that interest rate hikes by central banks around the world could trigger a global recession in 2023.
To combat rising prices, central banks have raised rates “with a degree of synchronicity not seen 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 slow economic growth.
The World Bank’s warning comes ahead of monetary policy meetings by the US Federal Reserve and the Bank of England, both of which are expected to raise key interest rates next week.
The World Bank reported on Thursday that the global economy was experiencing its steepest slowdown following a post-recession recovery since 1970.
According to the report, “the world’s three largest economies – the United States, China, and the eurozone – have been slowing sharply.”
“Under the circumstances,” it said, “even a moderate hit to the global economy over the next year could tip it into recession.”
Economic difficulties are already visible. FedEx warned investors on Thursday that a sharp and unexpected slowdown in activity, particularly in Asia and Europe, would cause revenue to fall hundreds of millions of dollars short of projections.
In response to the drop in demand, the company announced plans to close dozens of offices and reduce service.
The news sparked a widespread sell-off of FedEx stock, which dropped more than 20%. Other delivery companies’ stocks fell as well, including Amazon, Deutsche Post, and Royal Mail.
In response to the risk of a recession, the World Bank urged central banks to coordinate their actions and “communicate policy decisions clearly” in order to “reduce 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 and the war in Ukraine, which drove up energy, fuel, and food prices.
Central bank policymakers have responded by raising interest rates in order to cool demand from households and businesses.
Large rate increases, on the other hand, raise the risk of a recession by slowing the economy.
Central banks do not usually consult with their counterparts before making policy decisions.
They have, however, previously coordinated their actions to support the global economy.
A subprime mortgage crisis in the United States triggered a global financial crisis 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 all lowered their key interest rates at the same time.
The “intensification of the financial crisis has augmented the downside risks to growth and thus diminished further the upside risks to price stability,” they said in a statement.
“An ease in global monetary conditions is thus warranted,” they added.