World Bank chief economist Indermit Gill said prolonged conflict could worsen food insecurity by disrupting agricultural supplies and pushing up interest rates. WASHINGTON: Escalating hostilities between the US and Iran could reignite inflation, drive interest rates higher and knock global growth back to as low as 1.3%, down from 2.9% last year, World Bank chief economist Indermit Gill told Reuters. Gill, who retires at the end of August, said the bank had modelled three outcomes in its June economic forecast given the high uncertainty surrounding the war in the Middle East, but the worst-case scenario with hostilities lasting six months or more has already come close to materialising, he said in a late Tuesday interview.
Under that scenario, global headline inflation would reach 4.5%. Prolonged fighting and damage to the region’s oil infrastructure would also deepen food insecurity by disrupting shipments of fertiliser, helium and sulphur needed in agriculture, setting off a chain of secondary effects that could include higher interest rates, Gill said. His comments were the first by a senior World Bank official since a sharp rise in tensions between Washington and Tehran and the collapse of an April ceasefire agreement that had fuelled hopes of a less severe impact from the conflict.
The war escalated this week with US forces bombing targets in the south and west of Iran and Tehran hitting US sites in Bahrain, Kuwait and Jordan. Shipping in the Strait of Hormuz remained disrupted, and Yemen’s Iran-aligned Houthis announced a naval blockade on Saudi Arabian shipments through the Bab el-Mandeb strait leading into the Red Sea. Gill said poor countries that had not recovered from the Covid pandemic could face greater food insecurity, while nations with high debt levels would be hit by rising borrowing costs as interest rates climbed, squeezing spending on education, health and other vital services.
“My own sense of it is, maybe we are a few months away from that, you know, because you haven’t yet started to see policy rates go up,” he said. Once inflation accelerates, it could be just months before heavily indebted countries face grave problems meeting their debt service payments, he said. Some cash-strapped countries have asked the International Monetary Fund to augment existing loans, and Pakistan this week asked the US for a U…
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