Brace for global fallout from higher-for-longer interest rates, World Bank warns

financialpost.com:

The prospect that high interest rates will keep constricting the global economy is worrying World Bank officials as they look to the impact on nations nursing large debts.

Both Ajay Banga, the institution’s president, and chief economist Indermit Gill warned that the fallout from the sudden shift to an era of elevated borrowing costs may be tough.

“I do think that interest rates will stay higher for longer,” the World Bank chief told reporters in the Moroccan city of Marrakech Oct. 11. “That can be a complicated event in many ways, both for investments as well as for people who over the years got used to a lower interest-rate environment.”

The view from the Washington-based development lender followed Oct. 10’s assessment by its sister institution, the International Monetary Fund, that inflation next year will be faster than previously thought, while most of the world now faces weaker growth than before.

“In spite of all of these shocks, we have not seen any big economy really get into trouble — but the good news basically ends there, right?” Gill said at the same press conference at the global lenders’ annual meetings. “The trouble now is, because of the high rates, the high interest rates that you’ve mentioned, growth is slowing down a lot.”

Gill cited the example of the 1970s, when theFederal Reserve also durably kept rates high, and said that one lesson then was that the tightening cycle didn’t just take one or two years.

“It left about 24 economies bankrupt,” he said. “We should expect some countries to get into trouble now.”

The problem is that nations with large piles of borrowings then face a “crowding out” effect on private investment, Gill observed.

“If you look at Brazil for example, if you look at some of