WASHINGTON, April 11 (Reuters) – The International Monetary Fund warned on Tuesday that lurking vulnerabilities in the financial system could spark a new crisis this year and hurt global growth, but urged member countries to tighten monetary policy further to address the tackle persistently high inflation.
The warnings set an ominous tone for the IMF and World Bank spring meetings in Washington this week, with conflicting economic and market forces clouding the policy path as growth slowed in response to the central bank’s rapid rate hikes.
The IMF on Tuesday revised downwards its global growth forecasts for 2023, with its baseline assumptions for now ruling out a renewed flare-up of financial system turmoil following the failure of US lenders Silicon Valley Bank and Signature Bank in March and forced loan sales in Switzerland.
The fund’s World Economic Outlook projects real GDP growth of 2.8% in 2023 and 3.0% in 2024 — a tenth of a percentage point less than forecast in January for each year. The global economy grew by 3.4% in 2022.
The downgrades reflected weaker performance in some larger economies such as Japan, Germany, India and Brazil, offsetting stronger performance in the US and a smaller decline in the UK. The IMF also cited expectations of tighter financial conditions this year.
However, their forecast was dominated by downside risks, including even higher inflation, an escalation of the war in Ukraine and a severe downside scenario of a new financial crisis that could lead to sharp contractions in lending and household spending and a rush to safe-haven assets. The latter could knock global growth back to around 1% this year, effectively spelling a recession on a GDP per capita basis.
“DANGEROUS” RISKS
The IMF’s Global Financial Stability Report warned of a “dangerous combination of vulnerabilities” in financial markets and said some participants had not adequately prepared for the impact of interest rate hikes.
Such risks have risen rapidly after last month’s turmoil in the global financial system, with investors remaining nervous and some looking for the next weakest link that could spread contagion, IMF officials said.
“Even if you think banks have a lot of capital and liquidity on average, there could be these weak institutions that then fall back on the whole system,” said Tobias Adrian, director of the IMF’s monetary and capital markets department. said Reuters.
Despite the warnings, IMF chief economist Pierre-Olivier Gourinchas said inflation was still the bigger problem and that price stability should take precedence over financial stability risks for central banks’ monetary policies. Only in the event of a very serious financial crisis should these priorities be reversed, he told a press conference.
YELLEN SETBACK
US Treasury Secretary Janet Yellen dismissed the IMF’s outlook, saying at a separate press briefing that the outlook was “fairly positive,” although she said she remained “vigilant” about downside risks, including banking pressures and the war in Ukraine.
“I wouldn’t exaggerate the negativism about the global economy,” Yellen said, adding that a number of economies, including the United States, with strong labor markets, fewer supply chain problems and lower energy costs, have proven resilient.
Yellen said she saw no evidence of a credit crunch after the collapse of SVB and Signature Bank and that the US banking system is sound, with strong capital and liquidity positions. She added that the global financial system is also resilient due to the reforms implemented after the 2008 financial crisis.
Reporting by David Lawder, Andrea Shalal and Hannah Lang; writing by David Lawder; Edited by Paul Simao
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Hannah Lang
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