IMF Chief Economist Warns of Risks to Global Growth from Banks in Precarious Situation
Increasing interest rates have left banks in a more vulnerable position, presenting a risk to global growth.
- IMF's chief economist, Pierre-Olivier Gourinchas, expresses concern over the banking sector's impact on growth in 2023, particularly in the US but potentially in other countries as well.
- Central bank interest rate hikes have increased funding costs for banks, while losses in assets such as long-term bonds have also left them in a more precarious situation.
- While banks have healthy cushions, this situation may lead them to be more prudent and cut down lending somewhat.
- IMF predicts that funding conditions for banks could tighten further, squeezing lending, and bringing the forecast of 2.8% global growth in 2023 down to 2.5%.
- More adverse scenarios include massive capital flows from the rest of the world, a loss of confidence, dollar appreciation, and increasing risk premia, leading to the world economy growing at about 1% for this year. However, the likelihood of this scenario is comparatively low.
- The IMF has released its latest global growth report, which contains its weakest medium-term growth expectations in more than 30 years.
- Financial stability has been in the spotlight recently due to several US banks' collapse, Credit Suisse's swift sale in Europe, and turmoil in the UK bond market.
- Gourinchas believes the debate around central bank rate hikes has shifted from growth versus inflation to financial stability versus inflation.
- Central banks and financial authorities have the tools to address pockets of instability, such as US regulators guaranteeing deposits for Silicon Valley Bank customers and Bank of England gilt purchases.
- Gourinchas recommends that monetary policy stay focused on bringing inflation down.