Global markets remain vulnerable to central bank tightening, IMF says

The odds of a major market sell-off would be increased if monetary policy tightening is combined with a recession, Tobias Adrian said.
Image: Alex Kraus/Bloomberg

Global stock and bond markets are at risk of a sell-off because central banks including the Federal Reserve may be forced to raise interest rates more than investors anticipate to tame inflation, a top International Monetary Fund official said.

The odds of a major market sell-off would be increased if monetary policy tightening is combined with a recession, Tobias Adrian, director of the IMF’s monetary and capital markets department and a former senior vice president of the Federal Reserve Bank of New York, said in a phone interview on Tuesday.

The Washington-based fund earlier in the day slashed its world growth forecast by the most since the first months of the Covid-19 pandemic, and projected even faster inflation, after Russia invaded Ukraine and China renewed virus lockdowns.

“Central banks may have to tighten more than what is currently priced in, so there could be surprises down the road,” Adrian said. “I do think equities could see another sharp sell-off. Bonds could sell off further. Credit spreads have widened, but not dramatically so far. And yields could go up further. There could be further sell-off in rates of fixed-income, sovereign securities. So I think nothing is safe right now.”

The IMF sees inflation for this year at 5.7% in advanced economies and 8.7% in emerging and developing countries, significantly higher than just a few months ago. The pace of consumer-price increases is expected to slow to 2.5% and 6.5% respectively in each group of nations in 2023. The IMF cited a rising risk that inflation expectations become unanchored, prompting more aggressive central bank tightening.

In the US and some parts of Europe, inflation is accelerating at the fastest pace in decades, spurring expectations for central banks to tighten monetary policy more quickly than previously foreseen.

© 2022 Bloomberg

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