The IMF warns that a higher interest rate environment will increase fiscal pressure on advanced economies and deteriorate public debt and deficits. Global public debt will exceed 100% of GDP by 2030, a level not seen since World War II.
The International Monetary Fund (IMF) asserts that a higher interest rate environment threatens to exacerbate the public debt crisis already affecting several of the world's largest economies. According to the analysis from the Washington-based organisation, this scenario of monetary tightening will increase the fiscal pressure that governments are already under, as reported by elperiodico.com.
The two most influential central banks globally, the Federal Reserve (Fed) and the European Central Bank (ECB), raised interest rates in their last two meetings. The Fed, chaired by Kevin Warsh, did so on September 16, in a direct challenge to US President Donald Trump, amid rising inflation in the country, which has been above the 2% target for 65 consecutive months.
The ECB made a similar decision five days earlier, on September 11, marking the second increase in interest rates in four months, after already raising rates from 2% to 2.25% in its meeting on April 30. ECB President Christine Lagarde stated at that press conference that the forecast indicates inflation will remain "well above the target" of 2% for an extended period, implying that the Frankfurt-based institution does not rule out further rate hikes in its upcoming meetings.
This context of monetary tightening, undertaken to try to tame inflationary pressure stemming from the conflict in the Middle East that threatens to become the norm in the economy, is already showing its effects on other economic indicators. One of these indicators is public debt, and according to the IMF's analysis, a higher interest rate environment will increase the fiscal pressure already faced by several of the world's largest economies.
"Studies show that when debt is already high, an increase in interest rates leads to greater deterioration of debt and public deficits," summarise economists Era Dabla-Norris and Rodrigo Valdés.
They also warn that "a high level of debt makes market interest rates more sensitive to the evolution of public finances."
Beyond the immediate reality of public debt, the ramifications of monetary tightening are also perceived in the bond market, where yields have significantly increased in several advanced economies. "Between February and September, the average yield on 10-year G7 government bonds rose by more than one percentage point, reaching its highest level in nearly two decades," notes the Washington-based organisation.
In light of this reality, governments are facing higher financing costs at a time when debt is already high. In fact, given the high level of public spending, the IMF predicts that global public debt will exceed 100% of global GDP by 2030, a level not reached since the period immediately following the Second World War.
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