The International Monetary Fund (IMF) believes inflation could become “de-anchored” from expectations and has urged central banks to act aggressively.
In its latest Global Financial Stability Report, the IMF described current global financial conditions as tight, noting that downside risks to the economic outlook have increased as a result of the war in Ukraine.
“The global financial system has been stress tested with two shocks,” said IMF director of Monetary and Capital Markets Department Tobias Adrian.
“The first is a sharp increase in interest rates related to the tightening cycle of monetary policy around the world. The second is the adverse shock from the war in Ukraine, which has pushed commodity prices and food prices up and has adversely impacted supply chains further.”
With inflation deemed “well above a target” in the majority of countries around the world, Mr Adrian said “central banks have to act aggressively in order to bring inflation back down”.
“There is a risk of the anchoring of medium-term inflation expectations. So at the moment, we see that shorter term inflation expectations are very elevated. But then there's a gradual expectation of inflation coming back to target in most countries around the world.
“However, there's a risk that eventually inflation expectations cook the anchor and there could be more of an expectation of inflation, even in the medium term. Central banks have to counteract that by tightening monetary policy, slowing economic activity to bring inflation down,” he explained.
Asked about the US Federal Reserve working to balance tightening policy by raising rates, Mr Adrian judged the Fed's actions “appropriate”.
“We view the stance of monetary policy by the Federal Reserve as appropriate, and in our baseline forecast, we do have a softening of economic activity, which is the intended outcome of tighter monetary policy. But at the moment, we don't forecast a recession,” he said.
But Mr Adrian advised the Fed to “be very clear” in its communication about monetary policy in the current “high risk” environment.
As for the IMF's global growth expectations, the fund revised its forecast downwards to 3.6 percent in both 2022 and 2023.
"This reflects the direct impact of the war on Ukraine and sanctions on Russia, with both countries projected to experience steep contractions," said the fund’s chief economist Pierre-Olivier Gourinchas.
The fund has high expectations of Australia, revising its growth forecast to 4.2 per cent this year and 2.5 per cent next year. Inflation too is expected to top the Reserve Bank's expectations, with the IMF noting it will reach 3.9 per cent by December, before contracting to 2.7 per cent next year.
Earlier this week, the World Bank also downgraded its growth projection from 4.1 percent to 3.2 percent.
In the World Economic Outlook report - released at the beginning of the Spring Meetings of the IMF and World Bank in Washington - the bank noted three main reasons for its downgrade including the war invasion of Ukraine, inflation and a slowdown of the Chinese economy.
Maja Garaca Djurdjevic
Maja's career in journalism spans well over a decade across finance, business and politics. Now an experienced editor and reporter across all elements of the financial services sector, prior to joining Momentum Media, Maja reported for several established news outlets in Southeast Europe, scrutinising key processes in post-conflict societies.
