NEW DELHI: Central banks should take decisive action to prevent inflation from becoming entrenched and keep expectations of future price increases in check and Interest rates might have to rise beyond what is currently priced in markets to get inflation back to target in a timely manner, the IMF has said.
“In emerging markets, many central banks have already significantly tightened policy. They should continue to do so—depending on individual circumstances—to preserve their inflation-fighting credibility and anchor inflation expectations,” said Tobias Adrian, Financial Counsellor and Director of the IMF’s Monetary and Capital Markets Department.
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Adrian said policymakers should tighten selected macroprudential tools to tackle pockets of elevated vulnerabilities (for example, to lean against the surge in house prices), while avoiding a broad tightening of financial conditions. Striking the right balance here is important given uncertainties about the economic outlook, the ongoing monetary policy normalisation process, and limits on post-pandemic fiscal space.
He said Russia’s invasion of Ukraine raises financial stability risks for the world and poses questions about the longer-term impact on economies and markets. The war, amid an already slowing recovery from the pandemic, is set to test the resilience of financial markets and poses a threat to financial stability as highlighted in the IMF’s latest Global Financial Stability report.
“Ukraine and Russia face the most pressing risks. Yet it is already clear that the severity of disruptions in commodity markets and to supply chains are creating downside risks by weighing adversely on macrofinancial stability, inflation, and the global economy,” Adrian said in a blog.
“The new geopolitical reality complicates the work of central banks, which already faced a delicate balancing act with stubbornly high inflation. They must bring inflation back to target, mindful that excessive tightening of global financial conditions hurts economic growth,” said Adrian.
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He said against this backdrop, and in light of heightened financial stability risks, any sudden reassessment and repricing of risk resulting from an intensification of the war in Ukraine, or from an escalation of sanctions on Russia, may expose some of the vulnerabilities built up during the pandemic (surge in house prices and stretched valuations), leading to a sharp decline in asset prices.
