Washington, April 9 IMF Managing Director Kristalina Georgieva on Thursday urged central banks grappling with the impact of the US-Israel war on Iran to fight inflation even at the cost of growth, arguing that "pain is an unavoidable consequence of any conflict".
In her address at the IMF headquarters here, Georgieva also cautioned policymakers from around the world to reject "go-it-alone" actions such as export controls and price controls, which can further destabilize the global economy.
"Let me be clear upfront: this being a classic negative supply shock, demand adjustment is unavoidable. We cannot avoid some pain," she said, referring to the impact of rising oil prices on global economies.
"Policymakers can help to mitigate this pain in various ways. Certainly, one way they can help is – please do not make matters worse. So, I appeal to all countries to reject go-it-alone actions – export controls, price controls, and so on – that can further destabilize the global economy: don't pour gasoline on the fire," Georgieva said ahead of the upcoming IMF-World Bank spring meetings next week.
The IMF Managing Director said that if inflation expectations threaten to destabilize the economy and trigger a costly inflation spiral, then central banks should step in firmly with rate hikes.
"Rate hikes, of course, would further dampen growth – that's how they work," she said, adding that they are the "right price to pay for price stability".
The IMF Managing Director emphasized that fiscal support should remain targeted and temporary.
"Finally, if a severe tightening of financial conditions adds a negative demand shock to the supply shock, then monetary policy returns to a delicate balancing act while fiscal policy – if and only if there is fiscal space – switches to well-calibrated demand support," she said.
Georgieva said that supporting countries to build strong policies and institutions is the raison d'être for the IMF.
"And, as the firefighter, we are here for you when a crisis hits," she said.
The IMF Managing Director said that given the spillovers of the West Asia war, she expects near-term demand for IMF balance-of-payments support to rise to somewhere between USD 20 billion and USD 50 billion, with the lower band prevailing if the ceasefire holds.
She added that food insecurity due to transportation and supply chain disruptions caused by the war was expected to affect at least 45 million people.
"Even in the best case, there will be no neat and clean return to the status quo ante," she said.
Georgieva said that even in the Fund's "most optimistic scenario", infrastructure damage, supply disruptions, and a loss of market confidence, among other "scarring effects", would mean that growth would be less than expected.
She highlighted the "asymmetric" effects of the crisis, hitting low-income energy importers with limited fiscal space much harder than others.
"Let's not forget the Pacific Island nations at the end of a long supply chain, wondering if fuel will still reach them in the wake of such a severe disruption," she said.