IMF urges nations to use fiscal tightening to tame inflation

THE INTERNATIONAL Monetary Fund is urging countries grappling with the fastest inflation in three decades to tighten fiscal policy to help tame price increases and relieve the pressure on central banks to raise interest rates. 

Tax and spending policies have an important role to play in reducing the dependence on monetary policy to slow price increases, the IMF said in an analytical chapter of its Fiscal Monitor published on Monday ahead of next week’s Spring Meetings.

When central banks need to act alone, they’re forced to hike interest rates much more to fight inflation than when fiscal policy is working in tandem, the IMF said. At the same time, nations should look to protect poor citizens who benefit most from public services by implementing transfer programmes, it said.

“The message to policymakers right now is ‘do fiscal tightening, and do it in a way that provides support to the more vulnerable groups,’” Paolo Mauro, the deputy director of the IMF’s fiscal affairs department, said in a briefing.

The IMF found that for advanced economies, since 1985, reducing public spending by 1 percentage point of gross domestic product lowers inflation by half a percentage point.

Unexpected inflation, like that which the world experienced from mid-2021 to mid-2022, initially reduces the debt-to-GDP ratios of nations, with bondholders taking losses. But as price growth becomes more persistent and better anticipated, it stops contributing to declining debt ratios, the IMF said. BLOOMBERG