By Paula Escalada Medrano |
Washington, Apr 12 (EFE).- With the economies resisting the war in Ukraine better than expected, the main concern of the International Monetary Fund (IMF) today is financial stability and the possible vulnerabilities of the system due to the rise in interest rates, which have not yet fully emerged.
This was explained to EFE by the IMF’s research director, Pierre-Olivier Gourinchas: “Our biggest concern right now is perhaps financial stability,” he said in an interview.
Not only because of what happened in March with “some regional banks in the US.” (Silicon Valley Bank and Signature), but also because of what happened last fall “with some non-bank financial institutions” in the United Kingdom, with pension funds and “gilts” (government bonds or Treasury securities of the Commonwealth), he explained.
For now, he said, “the risks have been contained and financial stability has been maintained.” But, “looking to the future, do we really know where the sources of instability could be? Do we really have a confidence outlook in the financial sector? I don’t think we’re there yet,” she added.
The IMF published on Tuesday, in the framework of its spring meetings that are being held this week in Washington, its latest macroeconomic forecast report in which it stresses that uncertainty continues to reign in the global panorama and warns that the economy will continue to slow down in 2023 and it will only grow 2.8% this year.
All this in a framework with countries still absorbing the effects of the pandemic or the Russian invasion of Ukraine, inflation still very high and more restrictive financial conditions that make recovery difficult.
In the most probable scenario, it projects growth of 3% for next year, historically very low figures, although far from recession.
But as it usually does in each semi-annual report, the IMF draws possible alternative scenarios, one bad and one worse, in which the evolution of the war in Ukraine is no longer the protagonist of the risks. Now the banking situation is the issue that could most affect growth in the coming months.
All this is derived from the “very rapid increase in interest rates” that has been taking place since last year to control inflation, and that “is creating some secondary effects in the financial sector.”
“It is generating losses for some financial institutions, it is making them more vulnerable, and it is increasing their funding costs,” Gourinchas said.
The research director also explained that “there are still risks associated with the Russian invasion of Ukraine” but it is true “that the concerns we had are receding a bit.”
Among them “the impact of the war on the European economies”, since it has been seen that “they are more resistant to the energy crisis” and have adapted to the high energy prices in 2022 “better than expected”.
Collateral risks of rate hikes
With the aim of lowering inflation, the US Federal Reserve has carried out a series of increases in interest rates since March 2022. A total of nine increases to reach a range between 4.75% and 5%, the highest rate in the last 16 years.
For its part, the European Central Bank has raised rates six times since July 2022 and today they stand at 3.5%, the highest rate since 2008.
According to the Fund’s recommendations, these increases should continue until inflation is controlled, so it is expected that they will generate a tightening of financial conditions that will weigh on the activity of countries, including Spain, said Gourinchas.
In fact, although the IMF increased its growth prospects for the European country by four tenths, compared to those announced last January, and placed the figure at 1.5% (above the euro zone average), for next year it lowered them by four tenths and will only grow 2%.
“Banks are likely to reduce their lending, trying to be a bit conservative in terms of the exposure they have, and that will weigh heavily on activity going forward. We see something of that, not only in Spain, but also in several European economies”, added Gourinchas.
The banks, he added, “are going to be a bit prudent” in an environment “that is very uncertain and where there is a lot of nervousness about the financial markets.”
It is time, therefore, “to be concerned” about financial risks and also about the estimated medium-term growth, 3% in the next 5 years, a low figure that could weigh heavily on developing economies, especially.