The IMF says banking issues appear contained for now and that inflation is the bigger risk and top concern for central bankers and attendees of the IMF/World Bank spring meeting this week in Washington.
“Financial stability risks have been contained so far and hopefully that will remain the case,” Tobias Adrian, director of the monetary and capital markets department of the IMF, told Yahoo Finance in an interview. “As a result, monetary policy can focus on fighting inflation and that’s a desirable outcome.”
Stress in financial markets has complicated the task of central banks at a time when inflationary pressures are proving to be more persistent than anticipated. Adrian says inflation remains well above target both in the Euro area and in the US right now, noting that the US consumer price index excluding volatile food and energy prices actually went up.
Adrian’s advice for central banks: “…stay the course in terms of tightening until there is significant progress of getting inflation back to target.”
He added, “There’s certainly an upside risk to the path of interest rates and there’s an upside risk to inflation. It remains a precarious situation.”
The second biggest topic central bankers and meeting attendees are buzzing about this week is stress in the financial system, following the failures of Silicon Valley and Signature Banks in the US and Credit Suisse in Switzerland. Adrian says overall financial stability is being tested for the first time since the 2008 global financial crisis as monetary policy tightened and that after many years of low interest rates vulnerabilities have been building.
“I think that systemic risk has been contained to date and I’m confident in the crisis management toolkit that we have,” says Adrian, referring to backstops the Federal Reserve and FDIC employed to stop contagion from Silicon Valley Bank’s failure. “But I would not be surprised if there were other episodes of turmoil both in banks and nonbank financial intermediaries.”
The IMF warned in its Financial Stability report released Tuesday that the risks of tighter monetary and financial conditions could be amplified because of financial leverage, mismatches in asset and liability liquidity, and a high degree of interconnectedness between the nonbank financial intermediation sector and traditional banking institutions .
It argues this raises the specter of stress in some sectors—such as the venture capital, technology, and commercial real estate sectors—that have been particularly hit by the removal of ample liquidity.
The IMF estimates any kind of tightening seen in March as a result of bank failures will ultimately shave off about 0.5% of GDP. Adrian says that in some sense it makes the job of central bankers easier because they don’t have to tighten as much as a result.
The IMF warned Tuesday the risk of a recession has grown for advanced economies in the wake of bank failures in the US and Europe while slightly lowering its outlook for global growth this year. The IMF projects the global economy will expand at 2.8% this year, a hair lower than its January estimate of 2.9%.
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