The International Monetary Fund said in its report: “History teaches us that inflation continues.”
In the 1970s, only 60% of countries succeeded in controlling inflation within five years. Those who succeeded did so by keeping interest rates high for more than three years on average.
The Bank of England started raising interest rates just two years ago, suggesting that borrowing costs will need to remain high for at least another year to ensure inflation is truly beaten.
In addition to urging central banks to keep interest rates high for longer, the International Monetary Fund has warned governments against big spending or tax cuts.
The IMF said: “Central bankers are on the front line in the battle against inflation and should pay the greatest attention to these lessons. But governments should not make the job of monetary authorities more difficult by increasing price pressures through loose fiscal policy.”
Last week Jeremy Hunt announced what he called “the biggest business tax cut in modern British history.” The Chancellor has argued that a move to make investment tax relief permanent would boost growth without raising prices.
Despite the Finance Minister’s efforts to boost investment, a Bank of England survey of business chiefs showed that they expect investment to decline by about 10% in the last quarter of the year due to rising interest rates.
Companies also expect inflation to remain above 3% in three years, increasing pressure on the Bank of England to keep interest rates high.
Meanwhile, the International Monetary Fund has warned that hopes for significant growth in renewable energy and electric cars could be derailed by the fragmentation of the global economy.
Analysts have warned that critical minerals such as lithium and cobalt could stop flowing around the world if a separate economic bloc led by Russia and China emerges isolated from the West.
“Critical minerals may one day be as important to the global economy as oil is today,” the IMF said.
“Fragmentation in markets for critical minerals could make the transition to clean energy more expensive and potentially delay much-needed policies to mitigate climate change.”
In a scenario in which the world is divided, the IMF fears that investment in renewable energy could fall by a quarter in 2030 compared to current projections, while electric vehicle production may be a third lower than expected.