From pandemic to inflation
After the pandemic begins to wane and gets under control, the threat of inflation emerged in many countries. The main scourge is the surge in commodity prices. This situation will certainly lead to the tightening of monetary policy by raising interest rates. As a consequence, the performance of the real sector might be affected as interest in the financial sector, especially banking, tend to rise. Rising interest rates will make it more difficult for business players to get loan with low cost of funds. The implication, of course, is that efforts to spur higher post-pandemic economic growth can face complex and significant challenges.
When major central banks take steps to raise their benchmark interest rates to maintain economic stability or better known as “contractionary monetary policy,” not all countries are ready to face this. Affordable interest rate is still needed by the real sector to drive economic recovery. For example, the benchmark interest rate set by the Fed (the US central bank) is currently at 1%, after it raised it by 50 bps (0.5%) on May 4, 2022.
Inflation in the US which currently stands at 8.26% has “forced” the US central bank to take necessary steps to control inflation. On the other hand, this policy prompts capital flight from developing countries to developed countries. Indonesia (and several other developing countries) is among those affected, although to a limited extent, where the Rupiah exchange rate tends to weaken slightly against the US Dollar since the Fed increased its benchmark interest rate.
In addition to pushing up the benchmark interest rate and ultimately interest rates of loans, the current issue of inflation has become more complicated because some of the commodities that have become pricier are basic food items necessary for human survival. This means that when countries fail to prevent a food crisis, it will worsen global health. The world, which has just come out of a health crisis fuelled by Covid-19, is in danger of falling back into another health crisis due to the difficulty in accessing food. In other words, preventing the unfolding food crisis as soon as possible will prevent the world from suffering another health crisis in the making. Without the ability to immediately control the food crisis, efforts to ensure a sustainable economic recovery will be interrupted by crisis after crisis that hit the global economy.
One of the important agendas of Indonesia’s G20 Presidency is to ensure that the forum, which represents more than three quarters of the world’s economies, can ensure that the global economy can recover together from the impact of the Covid-19 pandemic, both in terms of economic growth and inflation control. The right diplomatic strategies are to resolve the Russia-Ukraine conflict, soften protectionism, and maintain the stability of the global financial sector. These are key to successful collaboration in restoring the global economy. (Eko Listiyanto)