Risks tied to a record $226 trillion in global debt will grow if the pace of rate hikes accelerates more than expected, says the IMF

• Global debt has soared to a record $226 trillion, fueled in part by the response to the pandemic.
• But risks associated with high debt are elevated as officials tackle high inflation, the IMF said Wednesday.

Public and private debt stands at a staggering $226 trillion worldwide, underscoring the importance of policymakers combatting hot inflation by raising interest rates to consider and mitigate the risks from that record amount, the International Monetary Fund said Wednesday.

Governments in 2020 rolled out sweeping spending programs to buffer their economies from a collapse in revenue because of the coronavirus crisis, driving the largest one-year debt surge since World War II, the institution said in a blog post on Wednesday.

The debt surge, while necessary, "amplifies vulnerabilities, especially as financing conditions tighten. High debt levels constrain, in most cases, the ability of governments to support the recovery and the capacity of the private sector to invest in the medium term," wrote Vitor Gaspar, director of the IMF's fiscal affairs department, Paulo Medas, a division chief in that department, and Roberto Perrelli, senior economist in the IMF's fiscal policy and surveillance division.

Even as the pandemic wears on, monetary policy is "now appropriately" shifting focus to rising inflation and inflation expectations. In the US, home to the world's largest economy, annual consumer price inflation in November soared to a 39-year high, to 6.8%. In Europe, a spike in energy prices contributed to eurozone inflation rising to 4.1% in October.

Many central banks are preparing to raise interest rates to prevent persistently high inflation, and are also planning to reduce their large purchases of government debt, and such actions will drive up borrowing costs.

"The risks will be magnified if global interest rates rise faster than expected and growth falters," the IMF said. "A significant tightening of financial conditions would heighten the pressure on the most highly indebted governments, households, and firms. If the public and private sectors are forced to deleverage simultaneously, growth prospects will suffer."

It said the uncertain outlook and heightened vulnerabilities make it crucial for officials to strike the right balance between policy flexibility, nimble adjustment to changing circumstances, and a commitment to credible and sustainable medium-term fiscal plans.

"Such a strategy would both reduce debt vulnerabilities and facilitate the work of central banks to contain inflation," it said.