The International Monetary Fund’s (IMF) economic counselor has warned of the potential consequences of tight monetary policies. Noting that “Inflation is much stickier than anticipated,” he highlighted that “financial risks have risen.”
IMF Economist’s Alert
Pierre-Olivier Gourinchas, Economic Counsellor and the Director of Research of the International Monetary Fund (IMF), shared his global economic outlook in a blog post released by the IMF Tuesday.
“The economic slowdown is most pronounced in advanced economies. Inflation is declining more slowly than expected,” he wrote. “Recent banking instability reminds us, however, that the situation remains fragile. Once again, downside risks dominate and the fog around the world economic outlook has thickened.” He added:
Inflation is much stickier than anticipated, even a few months ago … Core inflation, which excludes energy and food, has not yet peaked in many countries.
The IMF economist noted that “activity shows signs of resiliency as labor markets remain very strong in most advanced economies,” adding that “our output and inflation estimates have been revised upwards for the last two quarters, suggesting stronger-than-expected aggregate demand.” He underscored: “This may call for monetary policy to tighten further or to stay tighter for longer than presently anticipated.”
While voicing his opinion that he is “unconvinced” about the “risk of an uncontrolled wage-price spiral,” the IMF economic advisor said:
More worrisome are the potential ramifications that the sharp monetary policy tightening of the last year is commencing to have on the financial sector, as we have repeatedly warned might happen. Perhaps the surprise is that it took so long.
The IMF economic advisor explained that the financial sector had become too complacent about maturity and liquidity mismatches due to a prolonged period of low-interest rates and muted inflation. Nevertheless, the tightening of monetary policy resulted in losses on long-term fixed-income assets and raised funding costs.
“Recent banking instability reminds us, however, that the situation remains fragile. Once again, downside risks dominate and the fog around the world economic outlook has thickened,” he pointed out, elaborating:
We are therefore entering a difficult phase in which economic growth remains lacklustre by historical standards, financial risks have increased, yet inflation has not yet decisively turned the corner.
What are your thoughts on the view of the IMF’s economic counselor and the director of research? Let us know in the comments section below.
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