Inflation could spark new global financial crisis, says Russia’s central bank

Moscow: Russia’s central bank says a new financial crisis on the scale of the 2008 collapse could happen in less than 18 months if global inflation is not kept in check.

A surge in public and private sector debt levels during the recovery from the pandemic could cause the global economy to “deteriorate drastically and rapidly” if the US Federal Reserve has to jack up interest rates to quell inflation, the Bank of Russia warned in its annual monetary policy forecast.

The report said global gross domestic product growth could slow to just 1.1 per cent as higher interest rates prompt investors to dump risky assets. Emerging market countries with high levels of foreign debt would be particularly hurt.

“Risk premiums will increase significantly, the most indebted countries will struggle to service their debt, and a significant financial crisis will begin in the global economy in the first quarter of 2023 — one comparable to the 2008-2009 crisis, with a long period of uncertainty and a protracted recovery,” the central bank said.

The prediction is not the central bank’s central scenario. This instead foresees a broad economic recovery with inflationary pressures dissipating by the end of this year and is “significantly more likely” than its alternative scenarios of financial crisis, a worsening pandemic or rising global inflation.

Even so, the warning indicates Russia’s growing concern over increasing inflation worldwide. Whereas US and European central bank officials have said they consider price increases to be temporary, Russian central bank governor Elvira Nabiullina told the Financial Times in July that growing inflationary pressure in Russia was likely to be a long-term phenomenon.

Russia’s warning also comes as inflationary pressures build across emerging Europe. The region’s easing of coronavirus restrictions has brought economic output in the second quarter back to pre-pandemic levels.

At the same time, however, this “recovery has been accompanied by a marked increase in price pressures. Consumer and producer price inflation reached multiyear highs in July and shows no sign of letting up,” Capital Economics, a consultancy, said in a note to clients.

Several large emerging markets have raised interest rates aggressively this year in an attempt to keep rising inflation under control. Ukraine has raised its policy rate by 2 percentage points, Russia by 2.25 points and Brazil by 3.25. But pressures remain strong. Inflation in Brazil is running at 9 per cent, well above the central bank’s 3.75 percent target, and economists expect the policy rate to rise to 7.5 percent by the end of the year, from 5.25 percent today.

“Against this global setting, the CBR [Russian central bank] did the right thing of getting ahead of inflation with hikes,” said Elina Ribakova, deputy chief economist at the Institute of International Finance.