Amid the rising inflation across the world and subdued growth, Singapore central bank’s chief Ravi Menon said the global economy is facing four key uncertainties, including a downturn next year, according to a Bloomberg report. He added that the uncertainties include the severity of the downturn, inflation’s trajectory in the medium term, impact of geopolitics on markets and climate risk on portfolios as the main risks to the global outlook.
Menon, managing director of Monetary Authority of Singapore, has said the key question is how deep and prolonged will the downturn be, said the report. He also said it depends upon how high and persistent inflation is, in which case central banks have no choice but to tighten more and for longer than markets are predicting.
Ratings agency Crisil has said the outbreak of the Russia-Ukraine war in February triggered a sharp rise in commodity prices and increased the risk-off sentiment globally. The resultant high inflation globally made central banks tighten monetary policy and frontload rate hikes.
The US Fed started the tightening cycle with a 25 basis points (bps) rate hike in March and progressively increased the quantum of hikes to 50 bps in May, and 75 bps each in June and July.
“This led to a sharp tightening in global financial conditions. The peak period of stress was between January-June 2022, when the 10-year US Treasury yield increased 138 bps, S&P 500 declined 14.8 per cent, and dollar index appreciated 4.4 per cent. A 40.4 per cent rise in crude prices during this period further soured sentiment for oil importers like India,” Crisil said.
It also said since July, growing concerns of growth slowdown in major economies such as the US and China have brought down commodity prices from post-war highs. This has helped ease FPI outflows and rupee depreciation to some extent. Yet some headwinds have emerged again, with Fed Chair Jerome Powell re-emphasising the need for aggressive monetary tightening at the Jackson Hole summit. Global factors are hence extremely volatile and uncertain at this stage, which could keep domestic financial conditions on the edge.
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