Interest rate hikes are not the solution to the prevailing pandemic-related bottlenecks in global supply chains and disruptions in commodities markets, IMF has warned.
Instead,the International Monetary Fund says this should be done alongside reinforcement of financial conditions and clear communication by central banks on the need to further tighten the policy and steps required to control inflation.
In a statement, the fund said this will be crucial in preserving credibility in central banks globally.
It said high uncertainty has been clouding the economic and inflation outlook and in turn hampering the ability of central banks to provide simple guidance about the future path of policy.
IMF observed that in pandemic period, inflation was at multi-decade high in many countries and pressures broadened beyond food and energy prices.
Central banks in both advanced and emerging market economies took unprecedented measures to ease the financial conditions that surfaced.
The measures were also to support the economic recovery including interest rate cuts and asset purchases.
This was witnessed early last year when central banks in many emerging markets began hiking interest rates followed by advanced-economy counterparts later in the year.
The Central Bank of Kenya in May this year raised its policy lending rate by half a percentage point to stem the rising inflation and stabilise the shilling which has been falling against the US dollar and traded at Sh119.31 yesterday.
The CBK rate was increased to 7.5 per cent which complemented expectations of most analysts who had predicted the rise in policy rate in the coming months.
“We expect a hike in banks’ interest rates as the country fights off inflationary pressure brought about by rising oil prices and the economic fallout from the Russia-Ukraine onslaught which has hit food supplies,” analysts said.
Kenya's inflation rose to 7.9 per cent in June from 7.1 per cent the previous month, crossing the government's ceiling of 7.5 per cent.
IMF said that generally, the monetary policy cycle is now increasingly being synchronised around the world.
Most importantly, the pace of tightening is accelerating in several countries both in terms of frequency and magnitude of rate hikes.
It said this has influenced some central banks to begin reducing the size of their balance sheets, a step to normalise the policy.
“Central banks need to act resolutely to bring inflation back to their target to avoid de-anchoring of inflation expectations that would damage credibility that has been built over the past decades,” IMF says.
