IMF asks central banks to keep rates high for longer

The International Monetary Fund (IMF) believes that the historically high interest rates with which central banks around the world seek to quell inflation should remain at this level for longer.. This is reflected by the Washington-based institution in its latest global financial stability report published this Tuesday.

“With core inflation still high and falling slowly in many advanced economies, central banks may need to maintain tight monetary policy for longer than markets signal,” the IMF notes. “Central banks must remain determined in the fight against inflation until there is tangible evidence that it is moving sustainably towards the target,” they add.

Thus, the IMF emphasizes the need for central banks to reinforce their messages so that the markets internalize that rates are not going to fall in the short term.. In addition, they warn of the risks of relaxing monetary policy before inflation is clearly controlled.. Two 'hawkish' messages that coincide with a time in which the world economy is slowing down, as the IMF itself has confirmed.

That the official interest rates determined by central banks are reflected in the markets is crucial. The success of monetary policy depends on banks and financial agents creating monetary policy and making decisions accordingly.. For example, in the case of the ECB, markets expect the first rate cuts to arrive as early as June next year.

However, the stagnation that economies such as the eurozone have entered means that any further tightening of interest rates risks going too far.. European households and businesses are already suffering the negative impact of monetary policy – in Spain, especially in the form of more expensive variable mortgages – and it is expected that this will unfold its full effects in 2024. The IMF recognizes that renegotiations in the Debt terms or using pandemic savings to pay off loans may have cushioned the effect of rate hikes on the economy. However, these factors may not be enough to stop a trend in which the difficulties of repaying debts are increasing.

Financial system “resilient” for now

In the chapter dedicated to the global banking system, the IMF has been able to confirm that in general it remains resilient after having left behind the financial turbulence that caused the bankruptcy of Silicon Valley Bank or Credit Suisse in March of this year.. However, although most tensions have subsided, weaknesses still remain in some banks. The IMF warns that there are many banks in advanced economies with the potential to suffer significant capital losses.

Furthermore, they point out that in a scenario of severe stagflation – in which inflation remained high for longer and growth stagnated – there would be significant capital losses in a wide range of banks, including systemic entities in China, Europe and the United States.. They call for strengthening supervision and tightening capital standards.

Risks, an unexpected escalation of the war in Ukraine to which Israel is now joining or the Chinese real estate crisis leaked to more credit sectors could affect stability.

Slow ecological transition

Investment needs to be increased by $2 trillion annually by 2030 in emerging and developing economies. It would involve quadrupling the investment. The private sector has to cover the majority of investments.

– Climate policies and commitments of major banks and insurance companies still do not align with net-zero emissions targets, limiting the adaptation of private financial flows to the climate transition. zero, which limits the adaptation of private financial flows to the climate transition.