The World Bank says global central bank interest rate hikes could trigger a global recession in 2023.
Central banks have raised interest rates “with a synchronization not seen in the past five years” in response to soaring prices, the report said.
Higher interest rates make borrowing more expensive in an attempt to slow the pace of price increases.
But it also makes it more expensive to lend, which slows economic growth.
The World Bank’s warning comes ahead of monetary policy meetings of the Federal Reserve and the Bank of England, which are expected to raise key interest rates next week.
On Thursday, the World Bank said the global economy is in the midst of its most severe slowdown after a post-recession recovery since 1970.
It said a study found that “the world’s three largest economies – the United States, China and the euro area – have been slowing sharply.”
“In this scenario, even a slight hit to the global economy next year could send it into recession,” it said.
Signs of economic hardship are already emerging. On Thursday, courier giant FedEx warned investors that a sharp and unexpected slowdown in activity, especially in Asia and Europe, would result in a handful of billion dollars less in revenue than expected.
The company said it plans to close dozens of offices and reduce services in response to falling demand.
The news sparked a broad sell-off in FedEx shares, which fell more than 20 percent. Shares of other delivery companies, including Amazon, Deutsche Post and Royal Mail, also fell.
Faced with the risk of recession, the World Bank called on central banks to coordinate their actions and “clearly communicate policy decisions” to “reduce the degree of tightening needed.
In recent months, inflation – the rate at which prices are rising – has reached a 40-year high in the United States and the United Kingdom.
This is due to increased demand as a result of easing pandemic restrictions and the war in Ukraine, which has pushed up energy, fuel and food prices.
In response, central bank policymakers raised interest rates to cool demand from households and businesses.
However, a sharp increase in interest rates increases the risk of recession as it could lead to an economic slowdown.
Central banks do not usually have their peers make policy decisions.
However, they have coordinated their actions in the past to support the global economy.
In 2007, the subprime mortgage crisis in the United States triggered the global financial crisis.
This developed into a full-blown collapse after the collapse of Lehman Brothers investment bank in September 2008.
A month later, the Federal Reserve joined the European Central Bank and the central banks of Canada, Sweden and Switzerland in cutting key interest rates.
“The intensification of the financial crisis has increased downside risks to economic growth, which further reduces upside risks to price stability,” they said in a statement.
“Therefore, some easing in the global monetary environment is warranted,” they added.