IMF warns of looming inflation crisis on back of US-Israel war on Iran

The conflict has driven up prices of oil, natural gas, damaged refineries and other energy infrastructure.

The International Monetary Fund has warned of a potential inflationary crisis with the US-Israel war on Iran darkening the economic outlook, whether or not the fragile ceasefire holds.

IMF Managing Director Kristalina Georgieva said on Thursday that the fund will downgrade its forecast for the world economy next week.

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“Had it not been for this shock, we would have been upgrading global growth,” Georgieva said in remarks before next week’s IMF-World Bank Spring Meetings. “But now, even our most hopeful scenario involves a growth downgrade.”

The world economy had proven resilient in the face of United States President Donald Trump’s decision to impose sweeping taxes last year on imports from most the world’s countries. In January, the 191-country IMF had upgraded the global growth outlook to 3.3 percent and was poised to do so again when its new forecasts came out next Tuesday.

But the war, which began on February 28, changed everything. The conflict has driven up the price of oil and natural gas; damaged oil refineries, tanker terminals and other energy infrastructure; disrupted shipments of fertiliser that the world’s farmers depend on; and damaged the confidence of businesses and consumers.

Georgieva added that member countries need to “get your house in order” to build resilience as defence spending weighs on the global economy.

Georgieva also said she is optimistic the IMF will win approval from the US Congress this year for a review that would increase quota lending resources by 50 percent, making more of its $1 trillion in lending capacity immediately available. The US is the IMF’s largest shareholder.

She said the Fund has a “big cushion” of resources but needs the quota increase finalised to provide financial reassurance “because we don’t know what the future may bring”.

Georgieva’s comments come a day after the IMF released a new report outlining the economic impact of war on the global economy.

“On average, output in countries where fighting takes place falls by about 3 percent at the onset and continues falling for years, reaching cumulative losses of roughly 7 percent within five years,” the IMF said in its report.

But the report suggested that, as far as the economic outlook, the US economy may not take a hit, at least when it comes to increased war spending.

“Countries engaged in foreign conflicts may avoid large economic losses — partly because there is no physical destruction on their own soil,” it said.

Central Bank concerns

“The central bank cannot afford to let inflation spiral out of control,” Georgieva added.

The comments come before the US Federal Reserve’s two-day policy meeting that will decide US interest rates on April 28–29, and against the backdrop of political pressure from Trump to lower interest rates stateside.

However, it comes amid a stalling job market driven by shifts in trade and immigration policy in the US.

Other central banks, including the Bank of Mexico, said on Thursday that conflict in the Middle East risked pushing up inflation in Latin America’s second-largest economy.