Owing to cumulative monetary policy tightening by various Central banks, Moody’s Investors Service anticipates that the global economy will continue to decelerate in 2023.
In its global macro outlook titled “Global economic risks persist despite recent positive surprises,” Moody’s stated that the tightening of monetary policy will have a drag on economic activity and employment in the majority of nations.
“We forecast G-20 global economic growth will downshift to 2.0 per cent in 2023 from 2.7 per cent in 2022, and then to improve to 2.4 per cent in 2024,” the report read.
Inflation to be moderate
The report predicted that inflation would continue to moderate but did not ensure that it would reach Central bank targets.
The US model
For instance, while US inflation slowed in January to 6.4% from 6.5% in December and 7.1% the month before, it is still significantly higher than the aim of 2%.
The policy rate of the US Central bank is currently in its goal range of 4.50 — 4.75 per cent, which is the highest level in 15 years which was almost zero in the early months of 2022.
Raising interest rates helps inflation rate decline
Notably, raising interest rates is a monetary policy instrument that typically helps suppress demand in the economy, thereby helping the inflation rate decline.
“Our expectation that inflation will continue to fall through next year across most G-20 economies is contingent on a moderation in demand facilitated by Central bank actions,” said Moody’s.
“Central banks will keep interest rates restrictive for longer than the financial markets expect,” it added.
The report further stating about the Fed and other Central banks said “While there is a clear sense that the end to monetary policy tightening is near, how many more interest rate increases will be appropriate and how long rates will remain restrictive is unknown. The Fed and other Central banks would be forced into even more aggressive policy tightening if loosening financial conditions undermine their efforts to subdue aggregate demand.”
