The FMI asks not to stop the rise in rates even if it alters economic development
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According to its Report on Global Financial Stability, the International Monetary Fund (FMI) considers that central banks must maintain their rate hike rate, even if economic growth is affected, to return prices to their target.
The Fund has indicated in the document that “there is a risk that financial conditions will tighten a lot and that economic growth will slow down more than expected in the coming months, generating demands for a pause in the normalization of monetary policy.”
It is critical to avoid a stop and restart of the monetary policy normalization path that could affect price stability and result in a disorderly tightening of financial conditions.” “The authorities should be cautious against these requests and consider the deployment of appropriate tools in the event of market failure, the FMI continued.
However, the multilateral institution considers that a certain level of tightening of financial conditions is “necessary” to resolve inflation.
This is because, although central banks cannot act on supply chains or problems in commodity markets, they can slow down demand so that it is not out of balance with supply.
The organization has affirmed that “central banks must act decisively to return inflation to the target, avoiding an unanchoring of expectations that would damage the credibility built over the last decades. Central bankers must heed the lessons of the past: move too much slow to curb inflation and restore price stability requires more costly tightening afterwards and entails painful and disruptive economic adjustments later”.
Despite this, the FMI also recognizes that it is necessary that the tightening of financial conditions “be carefully calibrated” to prevent disorderly market conditions from putting financial stability at risk.
The Washington-based firm, in any case, has recalled that the prospects for financial stability at a global level have worsened in the last six months due to the rise in inflation and its consequences.
The Fund has warned that financial vulnerabilities are “high” in the sectors of sovereign issuers and non-bank financial institutions, where higher interest rates have generated additional stress. In the business sector, large companies have seen their margins reduced due to higher costs, while bankruptcies have begun among SMEs due to the higher cost of borrowing and less fiscal support.
Regarding the financial sector, a sudden tightness in funding conditions leading to a recession in 2023 would cause 29% of emerging market banks to struggle to meet their capital requirements. The recovery of these mattresses would cost 200,000 million dollars. Posted by Iraic.info, a news and information agency.
