The head of the International Monetary Fund has called on governments of major economies to tighten their belts as soaring bond yields strain budgets.
Speaking in Singapore, IMF Managing Director Kristalina Georgieva said the global debt-to-GDP ratio was at its highest level since World War II and was on track to reach 100% in the coming years.
She said governments could not rely on rapid economic growth to ease the debt burden – and would instead have to make “very difficult policy choices”.
Georgieva was speaking ahead of the annual meetings of the IMF and World Bank, which are due to be held in Bangkok next week. “My message to the world’s economic decision-makers will be: we cannot continue to delay necessary policy action – you have the tools, you now have the wisdom to use them.
“And yet we do not see decisive action in highly indebted advanced economies, where the current need is for credible medium-term fiscal consolidation plans, supported in some cases by upfront fiscal measures,” she said.
Bond yields – effectively the interest rate on debt – have surged in recent weeks, raising the cost of borrowing for many governments to multi-decade highs as markets adjust to the prospect of higher inflation resulting from the Middle East war.
“High yields are swelling the interest bill at a time of tight budget constraints and competing spending priorities, including defense,” Georgieva said, calling for “an urgent and comprehensive set of policy responses.”
The Bulgarian economist suggested that central banks should be ready to raise interest rates to stem the resurgence of inflation.
The ECB, US Federal Reserve and Bank of Japan have already tightened policy in the face of rising inflation – moves Georgieva called “entirely appropriate” – but the Bank of England has so far left rates unchanged at 3.75%.
“Now may be the time for cautiously hawkish monetary policy in many countries,” Georgieva said, suggesting central banks may want to err on the side of caution.
She also stressed the importance of addressing some of the risks related to AI, which has buoyed the U.S. stock market but sparked fears of mass layoffs.
She highlighted IMF research projecting that AI adoption could add half a percentage point to global economic growth if done effectively. However, she urged policymakers to “help manage the significant perils of AI, including large-scale labor market spillovers, serious cybersecurity and stability risks, and frontier models threatening to escape human control and run amok.”
Bank of England Governor Andrew Bailey, who also chairs the Financial Stability Forum which brings together the world’s central banks, recently warned of the “real and significant” risks posed by frontier AI models and called for the “right to intervene”.
In the UK, Chancellor John Healey said he would stick to his predecessor Rachel Reeves’ plans to balance daily spending with tax revenues – borrowing only to invest – and reduce the debt-to-GDP ratio over time.
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