IMF Warns of New Market Liquidations as Central Banks Tighten Policy

The International Monetary Fund has warned of more market sell-off as central banks try to combat higher inflation and ease pandemic stimulus measures.

Market players had started the year on an optimistic basis, predicting some economic momentum from an easing of Covid-19 restrictions, which would likely boost stocks. However, since Russia’s unprovoked invasion of Ukraine on February 24, that outlook has worsened, with more supply chain shocks and spikes in energy prices.

“There is certainly a risk of more sell-offs,” Tobias Adrian, the IMF’s director of capital and money markets, told CNBC on Tuesday.

“The intended consequences of monetary tightening are to tighten financial conditions to slow economic activity and I wouldn’t be surprised if we see some amount of asset valuations readjusting going forward and that could be in both equity and corporate markets. “. bond markets and sovereign markets,” she added.

The Fund’s warning comes at a time of heightened uncertainty for some major central banks.

The US Federal Reserve expects to raise interest rates a further six times in 2022, while the European Central Bank confirmed last week that it will end its asset purchase program in the third quarter.

However, this monetary tightening could accelerate if inflation remains high, which could affect market movements. The euro zone, for example, registered another record level in inflation figures last month with 7.5% annual; and the US reported its highest consumer price figures since 1981.

“The risk is growing that inflation expectations move away from the central bank’s inflation targets, prompting a more aggressive tightening response from policymakers,” the IMF said Tuesday in its latest Outlook. the worldwide economy.

In its latest economic assessment, the IMF said high inflation will last longer than previously expected. He also estimated that the inflation rate will reach 7.7% in the United States this year and 5.3% in the euro zone.