Inflation hits records all over the world... central banks are struggling

Audio 03:37

Investors are keeping a cautious eye on the impact of inflation on consumption in the United States, as a surge in prices raises the prospect of an interest rate hike as early as next year.

(Illustrative image) Angela Weiss AFP

By: Aabla Jounaïdi Follow

4 mins

To stem it, Western central banks are gradually reducing the inflows of liquidity injected at the height of the crisis to support the markets in the face of the health crisis.

The next step, investors predict, is higher interest rates.

And this raises concerns on the side of the less developed States.

The IMF has warned, they will have to prepare in 2022 for "episodes of economic turbulence"...

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The IMF, whose latest updated growth forecasts are expected next Tuesday, also fears the effects of the US rate hike.

Because in general, they are immediately reflected by a rise in long-term interest rates for emerging countries and even more heavily for the poorest countries.

Dollar borrowing costs, while still low for many, have already risen.

Several states increased their interest rates last year to respond to the inflation that is rampant everywhere.

This is the case of Brazil, Russia and South Africa... It is already costing them more to finance themselves.

What is also to be feared is the flight of capital from emerging countries

A scenario experienced in 2013... At the time, a brutal action by the FED, the American central bank, had led to a cascade of international capital outflows from emerging countries towards investments in more profitable and safer dollars.

It is this specter to which the Chinese president alluded on Monday.

At the launch of the Davos Forum on Monday, Xi Jinping warned the US central bank not to act too quickly at the risk of increasing market volatility, with negative consequences for emerging countries whose currencies depreciate against the dollar.

An even truer warning for low-income countries.

Because many are already very indebted... 

Even too indebted: 60% of low-income countries are over-indebted or on the verge of being so according to the World Bank. While we are far from over with the pandemic, it is even more complicated for these countries to face all the challenges: that of stabilizing prices, managing the health crisis while thinking about investments to prepare for the to come up. 

As you know, since the start of the crisis, some of these countries, some twenty in Africa, have benefited from measures to ease their debts (via the initiative to suspend debt service which was decided in the spring of 2020 by the richest states, those of the G20).

But this freezing device ended at the beginning of this month.

Debtor States must resume payment to their creditors and this in the worst of circumstances.

While the persistence of the virus considerably affects their income and hinders a possible recovery of their economy.

This is why some voices are calling for debt burden relief

Yes, because if there were unprecedented emergency loans from the IMF with the allocation of special drawing rights for 650 billion dollars - including 21 billion for low-income countries - that would not be enough.

Consideration should be given to canceling the debt for certain States.

It was the managing director of the IMF who recommended it at the end of last year.

For the time being, some States are still in discussion for a restructuring of their debts.

This is the case of Chad, Zambia and Ethiopia, which are discussing with their creditors within what is called the “common framework of the G20”.

A complex and slow process that the IMF calls for simplification and rapid extension to the most indebted countries... while granting a new break in the payment of claims during the negotiations.

In short,

In China, on the contrary, the central bank is lowering interest rates: this is the second drop in a month on Thursday.

And this to accelerate the recovery which is running out of steam in the health context.

Domestic demand is struggling... Already lowered in December, the benchmark for the most advantageous rates that banks can offer to businesses and households has suffered a further drop in order to facilitate mortgage loans.

Sales in the sector have been in decline in recent months as players in the sector such as Evergrande are in financial difficulty.

Construction and real estate is, as we recall, a quarter of Chinese GDP...

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