According to the International Monetary Fund (IMF), central banks around the world must prioritize and convey their policy decisions, commitment to price stability objectives, and the need to normalize monetary policy further.
The IMF advised central banks to return to goal and avoid anchoring inflation expectations, which could harm their credibility, in its latest Global Financial Stability Report.
According to the IMF’s Integrated Policy Framework, some emerging market economies managing the global tightening cycle may consider using a combination of targeted foreign exchange interventions, capital flow measures, and/or other actions to help smooth exchange rate adjustments and reduce financial stability risks while maintaining appropriate monetary policy transmission.
Tobias Adrian, the IMF’s Financial Counsellor, also stated that risks have increased since the April 2022 Global Financial Stability Report, and the balance is skewed to the downside.
Markets have been extraordinarily volatile in the face of the greatest inflation in decades and unprecedented uncertainty about the economy.
“We have high inflation and a deteriorating global economic outlook. At the same time, we have geopolitical risks with economic spillovers from the war in Ukraine. On top of all of this, global financial conditions have tightened as central banks continue to raise interest rates. Our latest Global Financial Stability Report shows that financial stability risks have increased since our last report, with the balance of risks tilted to the downside. Looking at the global banking sector, we can see that it has withstood the pressures up to now, helped by high levels of capital and ample liquidity. However, the IMF’s global bank stress test shows that these buffers may not be enough for some banks. For example, if we were to have a situation in 2023 with an abrupt and sharp tightening of global financial conditions enough to send the economy into recession coupled with high inflation, then up to 29% of bank assets in emerging markets would breach capital requirements. At the same time, most banks in advanced economies would pull through,” Adrian stated.
Faced with the prospect of persistently rising inflation, central banks in advanced countries and many emerging markets have been forced to expedite monetary policy normalization in order to avoid inflationary pressures from becoming entrenched. Global financial conditions have tightened in most regions as a result of monetary tightening.
“We observe that rising interest rates have added to the burden.” Both governments and non-bank financial organizations, such as insurance firms, pension funds, and asset managers, are coping with stretched balance sheets. We also see symptoms of stress in European financial markets. Concerns were also raised by recent volatility in the United Kingdom and China’s sharper-than-expected decline. Multiple hazards confront emerging markets in general.
These were caused by high borrowing prices, high inflation, turbulent commodities markets, and increased uncertainty about the global economy’s prospects. “The challenges are especially acute for smaller developing economies,” Adrian noted.
According to the IMF’s Integrated Policy Framework, some emerging market economies managing the global tightening cycle may consider using a combination of targeted foreign exchange interventions, capital flow measures, and/or other actions to help smooth exchange rate adjustments and reduce financial stability risks while maintaining appropriate monetary policy transmission.
Emerging markets may employ targeted foreign exchange interventions and capital flow strategies to manage the global tightening cycle. Both of these measures would assist to smooth out exchange rate fluctuations and lessen financial stability threats. Emerging and frontier markets should limit the risk of debt vulnerabilities, including early communication with creditors and international community support. Finally, in nations nearing debt difficulty, bilateral and private sector creditors should find ways to coordinate on preemptive restructuring in order to avert costly and difficult defaults,” Adrian stated.
