How close interest rates get to those levels will depend on whether alternative scenarios involving persistently higher government debt and deficit or financial fragmentation materialize.Ĭhapter 3: Coming Down to Earth: How to Tackle Soaring Public Debt Overall, the analysis suggests that once the current inflationary episode has passed, interest rates are likely to revert toward pre-pandemic levels in advanced economies.
To mitigate the uncertainty that typically surrounds estimates of the natural rate, the chapter relies on complementary approaches to analyze its drivers and project its future path. Chapter 2 aims to study the evolution of the natural rate of interest across several large advanced and emerging market economies. The natural rate of interest-the real interest rate that neither stimulates nor contracts the economy-is important for both monetary and fiscal policy it is a reference level to gauge the stance of monetary policy and a key determinant of the sustainability of public debt. Chapter 4 studies how such fragmentation can reshape the geography of foreign direct investment FDI and how it can affect the global economy.Ĭhapter 2: The Natural Rate of Interest: Drivers and Implications for Policy Supply-chain disruptions and rising geopolitical tensions have brought the risks and potential benefits and costs of geoeconomic fragmentation to the center of the policy debate. Chapter 3 examines the effectiveness of different approaches to reducing debt-to-GDP ratios. Public debt as a ratio to GDP soared across the world during COVID-19 and is expected to remain elevated.
The natural rate of interest is important for both monetary and fiscal policy as it is a reference level to gauge the stance of monetary policy and a key determinant of the sustainability of public debt. Inflation’s return to target is unlikely before 2025 in most cases. Global headline inflation in the baseline is set to fall from 8.7 percent in 2022 to 7.0 percent in 2023 on the back of lower commodity prices but underlying (core) inflation is likely to decline more slowly. In a plausible alternative scenario with further financial sector stress, global growth declines to about 2.5 percent in 2023 with advanced economy growth falling below 1 percent. Advanced economies are expected to see an especially pronounced growth slowdown, from 2.7 percent in 2022 to 1.3 percent in 2023. The baseline forecast is for growth to fall from 3.4 percent in 2022 to 2.8 percent in 2023, before settling at 3.0 percent in 2024.
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