Doubt and Economic Disruption Cloud the Growth and Inflation Outlook, Policymakers and Officials Say

[00:00:00]CNBC is on assignment in Washington D.C.

[00:00:03]>> [music] >> As the world's central bankers and ministers of finance gather for the International Monetary Fund and World Bank Group spring meetings with a volatile geopolitical backdrop and cutting-edge tech like artificial intelligence dominates [music] and influences debate on the outlook for the global economy.

[00:00:28]A big theme in discussions here in Washington D.C. is about the impact that global uncertainty is having on the outlook for growth and inflation. I look if the problem here is that neither the duration or the lasting impact on sort of energy infrastructure is fully clear to everyone. If once you get that picture clearer, it's much easier to understand how to deal with it. But the this whole thing started and the countries in the Middle East are the most impacted for obvious reasons. A country like Iraq, which is an oil producer, has no place to send its oil and no storage unlike some of the other countries in the Middle East. So they're having to close down oil wells. That's one kind of impact. Countries like Bangladesh are net oil importers and gas importers, different kind of impact. So this is an asymmetric impact depending on both how close you are to the conflict but also whether you're a oil importer exporter, you have storage, you've got fiscal room or not. So what I'm trying to do with all our clients is to say that look, you're going to have an impact on growth, you're going to have an impact on inflation. Make sure you get the inflation under control before you start worrying too much about getting back into worrying about the growth side. You've got to make sure that this gets managed. I don't think the disruption is something that even if there's a ceasefire that persists and you know, supply shortages, the Hormuz Strait opens up, it'll still take a few months for things to come back to where they were. So we have to prepare for a few months of some destabilization for these countries. And what you've put together is a war chest of three different things. One being immediate access to liquidity. Thanks to our crisis toolkit, our countries can get about 20 to 25 billion immediate access like literally tomorrow morning without new approvals.

[00:02:12]If this continues five or six months, we're going to repurpose some projects, look at some new projects in that area.

[00:02:18]We could get that number from 2025 to go to 50 or 60. If it continues beyond that, we got to start looking at our balance sheet and the head rooms we have to do more things with trade finance and guarantees and projects and then we could get to 80 to 100 billion over 15 months and in context in COVID, the bank put 70 billion to work. So I'm preparing a kind of a war chest of three types and three phased things to be able to cater to this. The policy makers at the meetings this week have been talking about the compounding impacts of crisis after crisis.

[00:02:52]>> Yes. As you look at emerging markets and developing economies that have faced these crises, how evident is your that Trump is playing with fire the longer this goes on? But in reality, the global economy was actually more resilient than people were giving it credit for based on that crisis after crisis conversation. To think back pre this conflict, economic growth was persisting to be around 3% with global inflation around 3%. That's actually not a bad number for all the things that people talk about from COVID to geopolitics and tariffs and the like. So I actually think they're getting less credit for our economies than they deserve and a lot of the emerging markets which I grew up in and you understand well, are markets that have learned lessons from prior crises. Their central banks have done a terrific job of managing their economies. So the factor is fiscal space is challenged in most countries, both developed and developing. That's the part that I worry about. So even the toolkit we put together to respond, one of the things I'm telling everyone is make sure you do no harm to your long-term fiscal circumstance. Try and keep the things you do targeted, temporary, and kind of very clearly transparent, so you could switch them on and off.

[00:04:07]>> So, let me stress perhaps two things in this unknown environment. First, the starting position is better than in 2022 because we have much less inflation. We have won the battle against inflation.

[00:04:19]And we have much less inflationary pressures on demand, supply, or on wages.

[00:04:26]And the second thing is perhaps to precise not exactly how we will act.

[00:04:30]This is too early to tell, but how we think. We as central banks are not responsible for the first-round effect, energy prices, or some prices of products which are directly impacted like plastics, fertilizers, helium, and so on.

[00:04:46]But, we are responsible to prevent possible second-round effect to services, manufactured goods, and wages.

[00:04:55]So, let me be extremely clear about the KPI we will look at. We will look at wages. We will look at inflation expectations of households and firms. Do they remain anchored? And we will look at underlying inflation.

[00:05:10]So far, if I look at the last figures published yesterday in the euro area, headline inflation increased significantly in March 2.6%. This is the first-round effect of energy.

[00:05:23]But, core inflation without energy and food remained limited and even slightly decreased at 2.3%.

[00:05:32]So, we will act without hesitation if needed and when needed, but we are not in a precipitation mode. We need to reach a sufficient level of data about the effect of on on underlying inflation second round and also the negative effect on demand and growth.

[00:05:54]The war in the Middle East is an adverse shock. It's an adverse supply shock where inflation expectations have come up. We have already seen inflation trends in a number of countries that have come up. It's particularly in oil and gas and energy more broadly at the moment, but we also expect food prices to go up. And so central banks are very focused on what they have to do in order to contain contain inflationary pressures. Oh, yes. If the war would end quickly, then the impact is limited both on inflation and growth for most countries. If it is longer, the impact on inflation is what would worry me most because if it last a couple of months more, if the straight of home is is blocked or half blocked, then we're going to have inflation that goes up more than 1% maybe 1 and 1/2% this year.

[00:06:43]And if it's even worse, it's last longer than inflation would go up 2 and 1/2%.

[00:06:49]That obviously would trigger probably stagflation and that's bad news for the world. And so we can only hope that a diplomatic solution can be found. We live in a world where we have a lot of challenges. So the last challenge of war in the Iran is one of them and it's quite difficult to assess what monetary policy will have to do. So during our March meeting, we assessed that at that time we didn't have enough information to to know or to assess whether to act or not, whether it would be necessary to to hike rates or not. So what we decided is that we will look thoroughly the the data that will come by the end of April when we have next monetary policy meeting.

[00:07:40]Then what we do what we did is that we produced a set of scenarios according to which we will act or not act in regards to monetary policy. So, according to baseline scenario uh, we will not have to act in a monetary policy stance because we assumed in this baseline scenario that this supply shock will will will go as fast as it came. But, I don't know whether this scenario is realistic or not. We'll see in next couple of weeks. But, for sure by June meeting we will have a lot of additional information on that and then we will we will also have uh, forecasts for next 3 years. And by then I hope we will be more sure um, what will be the consequences of the last shock in the economy or geopolitical shocks that we are facing right now. So, right now I would say that we are still lacking of uh, full availability of information in order to to assess whether what kind of monetary policy we will have to use. It's difficult to say because now it's different than in 2022.

[00:08:57]First of all, I think in 2022 we had much more growth, but we were in negative interest rate territory. So, a different starting point, but most people, young people have not experienced or had not experienced that time a longer periods of inflation or higher very elevated inflation. Now, the last inflation episode is only 2 or 3 years back in time. So, people and also companies have experienced that time and that means the reaction might be different. Reaction times might be different, but also the size of the reactions.

[00:09:32]So, we see first indications for second round effects, I would say, but it's too early to tell to what extent indeed the second round effects will be substantial for the inflation outlook.

[00:09:45]It all depends, and that's a difficult part of any assessment. It all depends on the duration of the conflict in the Middle East. Oh, yes. We are watching this very closely because things are still very uncertain. And as I said in terms of the global developments regard to how long will this conflict be and the duration itself is uncertain in terms of where will oil price land and even if the conflict were to end in the next couple of weeks. But we expect oil price to remain longer higher for for longer. And how does this fit into in terms of global cost conditions? And from there, how does this fit into the domestic prices? But again, the subsidy that we have in the country does help dampen the transmission. And second is that for Malaysia, we are also a net energy exporter. That will in a way help us as well. And third, the strengthening of the ringgit will also have some impact in terms of dampening the [music] transmission in prices. But we are watching this very closely.