The International Monetary Fund (IMF) has cut its global growth forecasts, and its Chief Economist, Pierre-Olivier Gourinchas, has called for central banks to continue to apply pressure to bring inflation rates down. Speaking to reporters in Washington, DC on Tuesday, April 11th, Gourinchas highlighted the need for vigilance, warning of a fragile economic outlook and downside risks.
The IMF's Revised Growth Forecasts
According to Gourinchas, global growth is expected to bottom out at 2.8% this year before rising modestly to 3% next year. These predictions are almost unchanged from the IMF's projections in January. The tightening of monetary policies by most central banks is starting to bring inflation back towards its targets, and persistent high inflation rates have led central banks and governments to tighten financial conditions.
Risks to Financial Stability
While tightening financial conditions may help to bring inflation rates down, it has also exposed some banking vulnerabilities, leading the IMF to warn of risks to growth. The recent banking instability has highlighted the need for vigilance in banking institutions, as their balance sheets may be vulnerable. Gourinchas pointed out that the sharp policy tightening of the last 12 months is starting to have side effects on the financial sector, which had become too complacent towards maturity and liquidity mismatches following a prolonged period of muted inflation and low interest rates.
Volatility in the Crypto Market
Gourinchas pointed in particular to the spectacular volatility in the crypto market, where assets like Bitcoin have fueled steep rises and falls in valuation on trade speculation. The recent headlines surrounding financial sector turmoil emphasize the need for vigilance in banking institutions that may have vulnerabilities to their balance sheets exposed.
The Need to Focus on Price Stability
Gourinchas emphasized the importance of monetary policy staying focused on price stability. He warned that if central banks were to pivot away from price stability, there is a chance that the fight against inflation would not succeed, and inflation expectations would start rising. This, in turn, would lead to even more persistent inflation and a source of macroeconomic instability. It would potentially feed further into financial instability.
Spillover Effects to Low Income and Developing Countries
The effects of inflation and tightening financial conditions in developed economies are having spillover effects to low-income and developing countries, according to the report. The IMF estimates that there are still about 60% of low-income countries that are in debt distress or at high risk, and about 25% of emerging market economies are at high risk and facing default-like spreads. This situation requires action.
Conclusion
The IMF's latest forecasts paint a fragile economic outlook for the global economy. Central banks are advised to continue applying pressure to bring inflation rates down. At the same time, vigilance is required to address downside risks and vulnerabilities in the banking sector. The report warns that the fight against inflation must remain the focus of monetary policy to ensure macroeconomic and financial stability. The effects of inflation and tightening financial conditions are also having spillover effects to low-income and developing countries, which require action to address their high-risk debt distress.
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