Christine Lagarde has cautioned that US-China rivalry may result in 5 per cent inflation increase while endangering the dollar and euro positions due to geopolitical tensions.
On Monday (17 April), the president of the European Central Bank stated that global supply elasticity may decrease, causing more instability, and geopolitical tensions may result in more multipolarity, as reported by the Financial Times.
"Global supply chain disruptions would severely impact critical sectors, including electric cars which rely heavily on imported materials. 14 critical materials are fully imported by the US, while Europe depends on China for 98 per cent of its rare earths supply," stated the speaker.
Lagarde warned that if global value chains break down along geopolitical borders, consumer prices could rise by 5 per cent in the short term and around 1 per cent in the long term, during a Council on Foreign Relations gathering in New York.
Countries may decrease reliance on dollar and euro by utilising alternatives, such as the Chinese renminbi, Indian rupee, or gold as a reserve asset. This was mentioned by her as there seems to be a growing trend in the usage of such alternatives in cross-border trade.
Lagarde stated that developing countries trading with China, the world's largest exporter, are likely to increase their reserves in renminbi.
Lagarde stated that there are no significant shifts in the utilisation of global currencies; however, it implies that the status of international currency should not be assumed without consideration.
To counter the US restrictions on technology exports, Beijing aims to lessen its reliance on foreign technological manufacturing. The call for “friendshoring” by Janet Yellen, the US Treasury Secretary, aims to have corporations invest more in countries they trust.
Lagarde warned that after a period of stability, lasting instability may lead to lower growth, higher costs, and uncertain trade partnerships.
At the IMF and World Bank meetings, policymakers expressed concerns that political tensions could disrupt global trade, slow growth, and increase inflation.
Lagarde remains optimistic and determined to tackle challenges ahead, urging countries to work together for greater policy cohesion.
Collaborative efforts between countries to secure supply chains and diversify energy production can create a cycle of higher growth, lower inflation, lower volatility and increased investment.
She cautioned that prioritising income support to counterbalance rising costs, instead of implementing temporary measures for sudden shocks, would escalate inflation while reducing investment in new production and increasing borrowing costs.
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