Global Courant 2023-04-11 20:58:14
Rate hikes have increased banks’ vulnerability — and their response poses a significant risk to global growth, the International Monetary Fund’s chief economist warned on Tuesday.
“We are concerned that what we have seen in the banking sector, particularly in the US but perhaps in other countries, could hurt growth in 2023,” Pierre-Olivier Gourinchas told Joumanna Bercetche of CNBC in Washington, D.C.
Central bank increases have increased borrowing costs for banks, while lenders have also lost some assets, such as long-term bonds.
“Banks are in a more precarious situation. They have healthy buffers, but it will certainly lead them to be a little more cautious and maybe cut back on lending,” Gourinchas said.
In one scenario, the IMF sees bank financing conditions tighten further and put pressure on lending, reducing its forecast of 2.8% global growth in 2023 to 2.5%.
Gourinchas said his models had also predicted a more adverse scenario in which financial stability is out of control.
“That would lead to massive capital flows from the rest of the world trying to return to safety, to US Treasuries, appreciation of the dollar, rising risk premiums, loss of confidence,” he said. In this scenario, the IMF sees the global economy grow by about 1% this year. But the chance of this happening is relatively low, Gourinchas noted, at about 15%.
The IMF released its latest global growth report on Tuesday, which contains the weakest medium-term growth expectations in more than 30 years.
Financial stability has been in the spotlight in recent months amid the collapse of several US banks, the rapid sale of Credit Switzerland in Europe, and turmoil in the UK bond market that nearly toppled pension funds last autumn.
Gourinchas told CNBC that the debate around central bank rate hikes had shifted from growth versus inflation to financial stability versus inflation.
He said central banks and financial authorities have shown they have the tools to deal with instability, for example US regulators guaranteeing deposits for Silicon Valley Bank clients and the purchase of Gilts from the Bank of England. “Monetary policy should remain focused on reducing inflation, which is our recommendation at the moment,” concludes Gourinchas.