According to International Monetary Fund article published on April 11, 2023, the IMF is trimming its global growth forecast and advising central banks keep up the pressure to drive down inflation, the IMF’s Chief Economist Pierre-Olivier Gourinchas said Tuesday (April 11) in Washington, DC.
“The massive and synchronized tightening of monetary policy by most central banks is starting to bring inflation back towards its targets. At the same time, serious financial stability related downside risks have emerged in our latest forecast. Global growth will bottom out at 2.8% this year, before rising modestly to 3% next year, almost unchanged from our January projections,” Gourinchas told reporters gathered at the Spring Meetings at the press conference for the World Economic Outlook.
Persistent high inflation globally has caused central banks and governments to tighten financial conditions. But that’s exposed some banking vulnerabilities, leading the Fund to warn of risks to growth.
“The recent banking instability reminds us, however, that the situation remains fragile once again. Downside risks dominate,” Gourinchas warned.
The recent headlines surrounding financial sector turmoil highlight the need for vigilance in banking institutions that may have vulnerabilities to their balance sheets exposed.
“More worrisome are the side effects that the sharp policy tightening of the last 12 month is starting to have on the financial sector. We have repeatedly warned this would not be an easy ride. Following a prolonged period of muted inflation and low interest rates, the financial sector had become too complacent towards maturity and liquidity mismatches,” said Gourinchas.
He pointed in particular to the spectacular volatility in the crypto market in which assets like Bitcoin have fueled steep rises and falls in valuation on trade speculation. But Gourinchas pointed out there could be a tipping point where action to control inflation may be superseded by the need to foster stability.
“So monetary policy needs to stay focused on price stability. There's a very important reason for this, which is that if at this point central banks were to pivot away from price stability, then there is a chance that the fight against inflation would not succeed. Inflation expectations would start rising, inflation would prove even more persistent. And that in itself is also a source of macroeconomic instability. And that would feed even potentially further later on into financial instability as well. So we would not be gaining on any front,” he explained to a crowd of reporters covering the Meetings.
The effects of inflation and tightening financial conditions in developed economies is having spillover effects to low income and developing countries, the report noted.
“We are we're estimating that at this point we have about still 60% of low income countries that are in debt distressed or or high risk of debt distress. And about 25% of emerging market economies are also at high risk and facing sort of default like type of spreads. And so that's a situation that requires action,“ Gourinchas added.
