The economic advisor of the International Monetary Fund (IMF) warned about the secondary effects of a strong monetary adjustment. Noting that “inflation is much more difficult than anticipated,” he emphasized that “financial risks have increased.”
IMF Economist Warning
Pierre-Olivier Gourinchas, Economic Counselor and Director of Research at the International Monetary Fund (IMF), shared his global economic outlook in a blog post published by the IMF on Tuesday.
“The economic slowdown is more pronounced in advanced economies. Inflation is falling slower than anticipated,” she wrote. “The recent banking instability reminds us, however, that the situation remains fragile. Once again, downside risks dominate and the fog around the global economic outlook has thickened. He added:
Inflation is much more rigid than expected, 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 resilience as labor markets remain very strong in most advanced economies,” adding that “our output and inflation estimates have been revised upwards over the past two quarters, suggesting stronger-than-expected aggregate demand. He stressed: “This may require monetary policy to tighten further or remain tighter for longer than currently anticipated.”
Stating that he is not “convinced” about the “risk of an uncontrolled spiral of wages and prices”, the IMF economic adviser said:
More worrisome are the knock-on effects that last year’s sharp monetary policy tightening is starting to have on the financial sector, as we have repeatedly warned could happen. Perhaps the surprise is that it took so long.
The IMF’s economic adviser explained that the financial sector had become too complacent about maturity and liquidity mismatches due to a prolonged period of low interest rates and subdued inflation. However, the tightening of monetary policy led to losses in long-term fixed income assets and raised funding costs.
“The recent banking instability reminds us, however, that the situation remains fragile. Once again, downside risks dominate and the fog around the global economic outlook has thickened,” he described, explaining:
Thus, we are entering a difficult phase during which economic growth remains mediocre by historical standards, financial risks have increased, and yet inflation has yet to turn decisively.
What do you think of the opinion of the IMF economic adviser and the director of research? Let us know in the comments section.
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