Increase in rates will only trigger a global recession

Monetary tightening will only hurt developing countries
It might not cool inflation either
Servicing costs on debt across various countries have risen well above 20%

On Monday, a report issued by the United Nations Conference on Trade and Development (UNCTAD) issued a warning that central bank monetary and fiscal policy is threatening the global economy.

It claimed that increasing interest rates in the United States will reduce future income from developing nations by $360 billion.

A Crisis in Developing Countries

The UNCTAD predicts that global economic growth will slow to 2.5% in 2022 and 2.2% in 2023, according to the report.

This will consume $17 trillion, or more than 20% of the world’s income.The organization describes the decline in growth rates experienced by developing economies as insufficient for sustainable development.

In addition, it asserts that interest rate increases are hitting the poor the hardest, with 90 developing nations experiencing a decline in the value of their currencies relative to the dollar in 2022.

Between January and July, more than a third of those nations experienced a decrease of more than 10%, with Argentina and Turkey experiencing declines of 23% and 31%, respectively.

According to the report, a stronger dollar makes the situation worse, raising the price of imports in developing countries.The repercussions are devastating for the poor everywhere, particularly at a time when the majority of workers’ wages remain stagnant.

Last month, the British pound fell to as low as $1.07 against the US dollar before recovering to $1.13 days later.Even Bitcoin outperformed the majority of fiat currencies against the dollar in the third quarter, despite the cryptocurrency bear market.

A “real risk” exists of a widespread “debt crisis” in developing nations, according to UNCTAD.In a number of nations, debt servicing costs have risen significantly above 20% of government revenues, with Somalia reaching 968.8%.

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The Answer:Reverse Course

The United Nations Conference on Trade and Development recommended that international financial institutions offer developing nations additional debt and liquidity relief as a means of preventing future financial crises.It also urged developing nation central banks to reverse course and avoid the temptation to use even higher interest rates to stop price increases.

Richard Kozul-Wright, director of the UNCTAD, also said that raising interest rates might not be the best way to stop inflation. Instead, he suggested that policymakers employ more targeted measures, such as taxing windfall profits and strategic price controls.

In the eyes of many, the United States entered a technical recession when it experienced its second consecutive quarter of negative GDP growth in July.