Efforts by central banks to reduce inflation could spark a global recession, according to a new report from the World Bank.

“If the degree of global monetary policy tightening currently anticipated by markets is not enough to lower inflation to targets, experience from past global recessions suggests that the requisite additional tightening could give rise to significant financial stress and trigger a global recession in 2023,” wrote the report’s authors Justin Guénette and Naotaka Sugawara, both senior economists in the World Bank’s prospects group, and Ayhan Kose, its acting vice-president for equitable growth, finance and institutions.

Global annual consumer price inflation reached nine per cent in July, the highest level recorded since 1994. Current forecasts predict the global core inflation rate, excluding energy, will reach five per cent in 2023. In response, central banks have raised interest rates by an average of four per cent this year. These hikes aren’t likely to reduce the global inflation rate to between two and three per cent in 2023, unless supply and labour market pressures subside.

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For inflation rates to be brought back into target ranges, the World Bank believes interest hikes will need to be raised an additional two per cent. However, it also noted this might wreck havoc on gross domestic product growth, which is already slowing. “If [increased rate hikes] were accompanied by financial market stress, global GDP growth would slow to 0.5 per cent in 2023 — a 0.4 per cent contraction in per capita terms that would meet the technical definition of a global recession.”

If central banks tighten monetary policy beyond existing market expectations, the global economy might escape a recession, noted the report. However, this would require the additional tightening to be implemented in such a way as to generate an orderly adjustment in financial markets.”

The report also said the long-term consequences of a global recession sparked by central banks would be felt most by people living in emerging markets and developing economies.

In a press release, David Malpass, group president of the World Bank, suggested central banks shift their focus from reducing consumption to boosting production “Global growth is slowing sharply, with further slowing likely as more countries fall into recession. My deep concern is that these trends will persist, with long-lasting consequences that are devastating for people in emerging market and developing economies.”

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