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Inflation could trigger another global financial crisis, Russian central bank says

By on September 5, 2021 0

Moscow: Russia’s central bank says a new financial crisis on the scale of the 2008 collapse could occur in less than 18 months if global inflation is left unchecked.

An increase in public and private sector debt levels during the post-pandemic recovery could lead to a “drastic and rapid deterioration of the global economy” if the US Federal Reserve is to raise interest rates to suppress inflation, the Bank of Russia warned in its annual report. monetary policy forecasts.

The report says global gross domestic product growth could slow to just 1.1% as rising interest rates prompt investors to shed risky assets. Emerging countries with high levels of external debt would be particularly affected.

“Risk premia will rise significantly, the most indebted countries will find it difficult to service their debt and a major financial crisis will begin in the global economy in the first quarter of 2023 – a crisis comparable to the 2008 crisis -” 2009, with a long period of uncertainty and a prolonged recovery, ”the central bank said.

Prediction is not the central bank’s scenario. Rather, it predicts a broad economic recovery with inflationary pressures dissipating by the end of this year and is “considerably more likely” than its alternative scenarios of a financial crisis, worsening pandemic, or rising global inflation. .

Even so, the warning indicates Russia’s growing concern over rising inflation around the world. While U.S. and European central bank officials have said they view price increases as temporary, Russian central bank governor Elvira Nabiullina told the Financial Times in July that rising inflationary pressure in Russia is likely a phenomenon. long-term.

Russia’s warning also comes as inflationary pressures intensify in emerging Europe. The region’s easing of restrictions on coronaviruses brought economic output in the second quarter back to pre-pandemic levels.

At the same time, however, this “recovery has been accompanied by a marked increase in price pressures. Consumer and producer price inflation hit multi-year highs in July and shows no signs of easing, ”Capital Economics, an advisory firm, said in a note to clients.

Several large emerging markets have raised interest rates aggressively this year in an attempt to contain rising inflation. Ukraine raised its key rate by 2 percentage points, Russia by 2.25 points and Brazil by 3.25 points. But the pressures remain strong. Inflation in Brazil is 9%, well above the central bank’s target of 3.75%, and economists expect the key rate to rise to 7.5% by the next month. end of the year, compared to 5.25% today.

“Faced with this global context, the CBR [Russian central bank] did what it took to get ahead of inflation with hikes, ”said Elina Ribakova, deputy chief economist at the Institute of International Finance.