Tightening monetary and financial conditions have sparked financial sector turmoil, with an increasing risk to market stability, the IMF’s Financial Counselor Tobias Adrian said Tueday (April 11) in Washington, DC. But the chief of the Fund’s Monetary and Capital Markets Department said so far, those risks have been contained.
“I think one of the key lessons from both the March episode and the October episode is that while there are vulnerabilities that can be triggered and can test financial stability, they are also policy tools that are available to policymakers in central banks and in deposit insurance agencies as well as finance ministries. And what we have seen is that these policy tools have been deployed in a very effective manner so that any threat to financial stability was contained and abated very quickly. So, vulnerabilities are there, but there are also many tools to contain risks to financial stability,” Adrian told reporters at the press conference for the Global Financial Stability Report.
Stock markets in developed countries have so far been seen by many analysts to be predicting a pause in the rate hike cycle, as economic weakness seems to be setting in to forecasts.
“What is priced into markets at the moment is a relatively optimistic view about inflation going forwards. Inflation is expected is priced in by markets to come back down to targets fairly quickly. And while we certainly hope that this is going to be the case, there's certainly a risk around this outlook on inflation,” Adrian warned.
Tightening monetary conditions to control inflation could eventually lead to a squeeze on financial markets underlying balance sheets. But at this point, the key battle is against stubbornly persistent inflation, Adrian reported.
“I think the pace of tightening is it has been appropriate. And we continue to expect that inflation is going to converge back to target. And you know, what we have seen is that central banks and deposit insurance companies do have the tools to address any turbulence in the banking sector. So, I would not expect at this point that, you know, monetary policy will be any different because of financial stability concerns,” he answered reporters pressing him.
The IMF report found that although there are risks, the lessons of the 2008 global financial crisis have taught banks to be more cautious, and therefore prepared for the current turmoil.
“Of course, capital and liquidity today is much higher than there were in the 2008 crisis. To date, much of the asset side of banks have been impacted by interest rate risk and less so by credit risk. Right? So, we are expecting that the economy globally is going to slow down. But when you look at solid like metrics of, you know, credit risks on on banks, those have not deteriorated sharply in most countries,” said Tobias.
The full report is available at IMF.org/GFSR