IMF warns long war may require painful interest rate hikes
IMF Chief Economist Pierre-Olivier Gourinchas says a long war may require painful rate hikes. The institution cut its 2026 growth forecast to 3.1 percent.
The International Monetary Fund (IMF) has cautioned that central banks may need to implement more aggressive monetary tightening to control inflation if a protracted conflict involving Iran continues. Pierre-Olivier Gourinchas, the IMF’s chief economist, suggested that the economic effort required to stabilize prices could be more painful than the measures taken during the post-pandemic recovery period.
Gourinchas compared the current situation to the 2022 energy shock following the invasion of Ukraine by Russia. While oil prices exceeded $100 per barrel then, an overheated economy meant that small interest rate hikes were highly effective. Today, however, the global economy has more slack and a weaker labor market, meaning central banks may need to push harder to achieve the same results, particularly if prices for Brent Crude Oil and Natural Gas remain elevated.
\"You may have to inflict a lot more pain to get the same disinflation result.\"
A significant risk identified by the IMF is the potential for inflation expectations to become unanchored. In this environment, businesses and workers, already sensitive to price changes following the 2022 shock, would be quicker to raise prices and demand higher wages.
\"Once we get into that world, people are going to look at this and say, inflation is here and its here to stay.\"
The IMF has revised its 2026 global growth forecast down to 3.1%, assuming a short conflict and oil prices averaging $82. Under an adverse scenario with $100 oil, growth is expected to slow to 2.5%. In a severe case of extended conflict with oil reaching $110 this year and $125 in 2027, growth could plummet to 2.0%, a level the IMF considers the threshold of a global recession.
