Policymakers face a difficult environment. They need to head off rising inflationary pressure, while also being mindful of downside risks to growth.
Many central banks have tightened monetary policy stances but interest rates in emerging and developing economies generally remain negative in real terms, particularly in countries where exchange rate management has limited monetary policy flexibility.
The risk of second-round effects from the surge in commodities prices and continued stress in financial markets complicates the response to the slowdown, particularly in advanced economies. The case for policy tightening in these economies is stronger than before the recent oil price increase but still not established, given that inflation expectations and labor costs are projected to remain well anchored and growth momentum is weak. However, inflationary pressures need to be monitored closely. In many emerging economies, particularly those that continue to operate above trend growth, monetary policy needs to be tightened combined with greater fiscal restraint and, in some cases, with more flexible exchange rate management, in order to reverse the recent build-up in inflation.
-Global slowdown and rising inflation