Economic counselors at the International Monetary Fund (IMF) warned of the side effects of sharp monetary tightening. He noted that “inflation is much stickier than expected,” and stressed that “financial risks are rising.
IMF Economist Warns
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Pierre-Olivier Goulanchat, economic counselor and head of research at the International Monetary Fund (IMF), shared his outlook for the global economy in a blog post published by the IMF on Tuesday.
“The slowdown is most pronounced in advanced economies. Inflation is falling more slowly than expected.” He wrote.
“However, recent instability in the banking system reminds us that the situation remains fragile. Once again, downside risks are dominating and the fog over the global economic outlook is thickening.” He added that
Inflation is much stickier than we expected a few months ago … core inflation, excluding energy and food, has not yet peaked in many countries.
IMF economists noted that “activity is showing signs of resilience as labor markets remain very strong in most advanced economies,” and “our output and inflation forecasts have been revised upward over the past two quarters, suggesting stronger than expected aggregate demand.” He added.” He stressed that: “This may call for monetary policy to tighten further or remain tighter for longer than currently expected.”
The IMF’s economic advisors were “unconvinced” about the “risk of an uncontrollable wage-price spiral,” but said:
More worrisome is that, as we have repeatedly warned, the sharp monetary tightening over the past year has had financial sector, as we have repeatedly warned. Perhaps the surprise is that it has taken so long.
IMF economic advisors explained that the financial sector had become too complacent with the mismatch between maturity and liquidity due to prolonged low interest rates and subdued inflation. However, the tightening of monetary policy resulted in losses on long-term fixed assets and higher funding costs.
“However, recent banking instability reminds us that this situation remains fragile. Once again, downside risks have become dominant and the fog over the global economic outlook has thickened,” he elaborated:
So we are entering a troubling phase where economic growth is scarce by historical standards, financial risks have increased, and inflation has yet to turn decisively around.
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