Central Banks should remain focused on fighting inflation –IMF
With rising inflation taking its toll on several countries, the International Monetary Fund (IMF) on Tuesday, urged Central banks across the world to focus 100 per cent on fighting inflation, strengthening financial supervision and risk monitoring.
This was even as the Fund raised its outlook for the world economy, stating that global gross domestic product (GDP) was likely to expand by 3 per cent. The IMF in its latest World Economic Outlook monitored by Daily Sun said the rise in central bank policy rates to fight inflation continues to weigh on economic activity, adding that the US Federal Reserve and the Bank of England were expected to raise rates by more than assumed in April, before cutting rates next year.
It therefore urged central banks to remain focused on fighting inflation, strengthening financial supervision and risk monitoring as it noted that should further strains appear, countries should urgently provide liquidity.
The Washington-based Fund also advised countries to build fiscal buffers to guard against further shocks and ensure support for the most vulnerable.
Speaking on the key outcomes of its policy for the period, the IMF Chief Economist Pierre-Olivier Gourinchas, said that central banks have to be very vigilant on the health of the financial sector because they could have something that basically seizes up very quickly and added that there is always a risk that if financial conditions tighten, it can have a disproportionate effect on emerging market and developing economies.
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He further stated that unfavourable inflation data could trigger a sudden rise in market expectations regarding interest rates, which could further tighten financial conditions, putting stress on banks and nonbank institutions – especially those exposed to commercial real estate.
“Contagion effects are possible, and a flight to safety, with an attendant appreciation of reserve currencies, would trigger negative ripple effects for global trade and growth.
Fragmentation of the global economy given the war in Ukraine and other geopolitical tensions remained another key risk, especially for developing economies. This could lead to more restrictions on trade, especially in strategic goods such as critical minerals, cross-border movements of capital, technology and workers, and international payments”, Gourinchas said.
Whilst explaining the reason for its 2023 global growth projection, the IMF stated that this is coming due to the resilient economic activity seen in the first quarter (Q1) of 2023 and added that inflation was coming down together with acute stress in the banking sector which has receded.The body warned that persistent challenges were dampening the medium-term outlook, noting that the balance of risks facing the global economy remained tilted to the downside and credit was tight. Gourinchas said, “We are on track, but we are not out of the woods. What we are seeing when we look five years out is actually close to 3 per cent, maybe a little bit above 3 per cent. This is a significant slowdown compared to what we had pre-Covid.”
This was also related to the aging of the global population, especially in countries like China, Germany and Japan. The outlook is “broadly stable” in emerging markets and developing economies for 2023-2024, with growth of 4 per cent expected in 2023 and 4.1 per cent in 2024”
