The International Monetary Fund warned on Tuesday that lurking financial system vulnerabilities could erupt into a new crisis and slam global growth this year, but urged member countries to keep tightening monetary policy to fight persistently high inflation.
The warnings set an ominous tone for the IMF and World Bank spring meetings in Washington this week, with conflicting economic and market forces clouding the policy path as growth slows in response to rapid central bank interest rate hikes.lower, its baseline assumptions excluding, for now, a major new flare-up of financial system turmoil after the failures in March of U.S. lenders Silicon Valley Bank and Signature Bank and Switzerland's forced sale of Credit Suisse.
But its forecast was dominated by downside risks, including even higher inflation, an escalation of the war in Ukraine and a severe adverse scenario of a new financial crisis that could prompt sharp pull-backs in lending and household spending and a rush into safe-haven assets. The latter could slam global growth back to about 1% this year, effectively a recession on a per-capita GDP basis.
"Even if you think that on average, banks have a lot of capital and liquidity, there could be these weak institutions that then spill back into the system as a whole," Tobias Adrian, the director of the IMF's Monetary and Capital Markets Department, told Reuters. over financial stability risks for central banks' monetary policy. Only in the event of a very severe financial crisis should those priorities be reversed, he said in a news conference.that the outlook was "reasonably bright" though she said she was staying "vigilant" to downside risks including banking pressures and the war in Ukraine.
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