G20 promises to calibrate pace of interest rate hikes and avoid indirect impacts

Leaders of the world’s largest economies agreed to be cautious about interest rate hikes to avoid knock-on effects, and warned of “increased volatility” in currency movements, a radical shift from last year’s focus. to contain the effects of the Covid-19 pandemic.

In a leaders’ declaration signed this Wednesday (16), the members of the Group of 20 (G20) said that the world economy is facing “unparalleled multidimensional crises”, ranging from the war in Ukraine to the jump in inflation, which is forcing many central banks to tighten monetary policy.

“The G20 central banks… are closely monitoring the impact of price pressures on inflation expectations and will continue to appropriately calibrate the pace of monetary policy tightening in a data-dependent and clearly communicated manner,” the statement signed after a two-day meeting of the G20 Summit in Bali.

Central banks will also be mindful of the need to limit indirect impacts, the statement added, in a nod to concerns in emerging economies about the potential for large capital outflows if aggressive US rate hikes continue.

“Central bank independence is crucial to achieving these goals and bolstering the credibility of monetary policy,” the statement added.

The emphasis on the need to contain inflation contrasted with last year’s G20 statement, which said central banks should avoid overreacting to transient increases in inflation.

G20 leaders also called for “temporary and targeted” fiscal spending for low-income households particularly vulnerable to rising living costs. Last year, leaders warned against any premature withdrawal of support to ensure the global recovery remained intact.

The shift in tone underscores the rapid change in the global environment and policy priorities, caused in large part by the Russian invasion of Ukraine in February.