VOLATILITY in global commodity markets and an increasingly risk-averse trading environment are likely to sustain inflation “well above comfort levels” for the rest of the year, according to Moody’s Analytics.

Indeed, the coming months could see central banks continue to withdraw extraordinary pandemic-driven stimulus and tighten rates aggressively, said economist Shahana Mukherjee in her report Global Outlook: The Big Challenge.

Global GDP (gross domestic product) growth is forecast at 2.8 per cent in 2022 and 3.1 per cent in 2023, even as Mukherjee noted that “the divergence in growth outcomes will continue to widen this year, contingent not only on each country’s reliance on energy and food imports, but also on levels of trade and investment with Russia, China and Ukraine”.

Asia and the US are expected to support global growth with GDP up 4.1 per cent and 2.7 per cent, respectively, in 2022. China and India will remain in expansion, though growth will moderate to 4.5 per cent and 7.4 per cent, respectively, in 2022 before picking up in 2023, she said. Eurozone GDP growth is forecast at 2.7 per cent in 2022 and 2.1 per cent in 2023, while Japan’s growth is 1.6 per cent in 2022 and 2.4 per cent in 2023.

Meanwhile, policy challenges abound as central banks move to withdraw stimulus and tighten rates aggressively.

“With most current inflation being imported or supply-driven, the effectiveness of monetary policy as an instrument to tame price pressures will be limited,” she said.

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“Not only will consumers contend with weaker real purchasing power, but higher borrowing costs and tighter financing conditions can weigh heavily on leveraged households, hurt business confidence, and delay investment decisions.”

Meanwhile, for developed countries such as Australia which have momentum tied to the property market, such a stance could risk a steeper and a more prolonged price correction that could undermine the financial stability of the banking system if default rates climb, she said.

On the emerging markets front, these economies could be disproportionately hurt if spending and employment prospects suffer a serious setback due to tighter financing conditions. Depreciation pressures from narrowing interest rate differentials could also worsen current account deficits and aggravate imported inflation.

Some central banks in Asia have intervened in foreign exchange markets in recent weeks to stem the magnitude of local currency depreciation. But running down on foreign exchange reserves at a time when import bills are climbing could risk longer-term stability, particularly for emerging market Asian economies heavily reliant on energy imports, said Mukherjee.

“Overall, the painful but necessary policy response to current inflation will not just see central banks possibly overshoot their neutral rates in the short term, slowing growth; it could also elevate recession risks for some countries and widen income and welfare disparities in the second half of 2022,” she said.