WASHINGTON, April 16 (Xinhua) -- The International Monetary Fund (IMF) on Tuesday said there are likely to be "bumps" as the fight against inflation is entering its "last mile," calling for a multi-pronged approach to preserve financial stability.
There is recent evidence that disinflation may have stalled in some countries, and that underlying inflation may be persistent in some sectors, Tobias Adrian, director of the IMF's Monetary and Capital Markets Department, told a press briefing during the 2024 Spring Meetings of the IMF and the World Bank.
Despite progress on inflation, the IMF noted that an intensification of geopolitical tensions could further disrupt shipping and energy production and push up inflation once again, according to its latest Global Financial Stability Report.
Adrian pointed out that a divergence between asset price volatility and uncertainty has preceded volatility spikes, which could occur when investors are jolted by adverse shocks, prompting their re-valuing of assets to account for high uncertainty.
One such adverse shock along the last mile could be upside inflation surprises, he said.
If inflation remains high, expectations that central banks such as the U.S. Federal Reserve will soon cut rates could topple, which could lead to a correlated selloff of assets, from bonds to stocks to crypto assets, the IMF official noted.
Under this scenario, financial conditions would broadly tighten, he said, adding that borrowers worldwide would find it harder to service debt, given higher bond yields.
The report noted that emerging market borrowers are often disproportionately affected in these situations, as many such issuers already face refinancing rates higher than interest rates on outstanding U.S. dollar-denominated sovereign bonds.
Calling for a multi-pronged approach, the report argued that financial regulatory authorities should take steps to ensure banks and other institutions can withstand defaults and other risks, using stress tests, early corrective actions, and other supervisory tools.
Further progress on recovery and resolution frameworks is also of first order importance, to limit the fallout from the demise of weaker institutions, the report said.
Central banks should ensure banks have access to liquidity facilities when needed and be prepared to intervene early to address funding stress in the financial sector, it added.
