WASHINGTON Reuters - Central banks shouldn't halt their fight against inflation because of financial stability risks that look very contained, International Monetary Fund chief economist Pierre-Olivier Gourinchas told Reuters.
The IMF has built expectations of more persistent inflation and tightening into its latest economic forecasts on Tuesday compared to its outlook in January, Gourinchas told Reuters in an interview. After banking sector turmoil in March, the IMF also factored in a slight pullback in bank lending, he said.
The IMF's World Economic Outlook shows a 0.1 percentage point decline in global growth to 2.8% for 2023, partly because of these factors, along with slowdowns in Europe, Japan and India, offset by improvements in the United States.
Gourinchas said that most large central banks, including the European Central Bank, the Federal ReserveFederal Reserve, and the Bank of England, are already near the peak of their rate hike cycles.
He said that they may need to do a bit more if inflation proves to be more persistent, but a pullback in lending by banks may do the job for the central banks after recent financial turmoil, but he said they might be able to help the economy without the need for more aggressive rate hikes.
Asked if continued rate hikes were creating bigger stability risks in extending the maturity and interest rate mismatches between assets and liabilities, Gourinchas came down firmly on the side of keeping up the inflation fight.
Is it causing financial instability further down the road and should they stop doing this? He asked. Financial instability is very contained, and our assessment is no. Gourinchas said that monetary policy isn't doing enough on the inflation front, and that is creating a problem of its own, because of the fact that monetary policy is now based on stability risks.
Instead, authorities should contain stability risks with tools used in the wake of the failures of Silicon Valley Bank and Signature Bank, such as central bank lending facilities and other backstops, which would free up monetary policy to focus on bringing inflation down.
There is the monetary policy path, and then there's the financial stability and these two can be thought of separately, and I think that remains the right policy combination at this point, he said.
He said that while the Fed and the ECB are very close to the top of the hiking cycle, market participants are betting that a quick shift back to easing rates is going to be disappointed.
In my sense, if they're expecting that because they think the Fed or central banks should take into account financial stability arguments. We're not there, Gourinchas said.
As market expectations become more realigned with what the central banks are communicating, this could lead to an adjustment of yields on longer-term securities. He added.
Gourinchas said the U.S. economy has proved surprisingly resilient and there is little evidence that the Fed has tightened too much, especially after strong March U.S. jobs data on Friday pushed the unemployment rate down to a historically low 3.5%.
He said that a softening of the job market should be happening and is assumed by the IMF's 2023 U.S. growth forecast of 1.6%.
He said that too much would be if we started slowing the economy very quickly and if unemployment was rising very fast, but we really are not there at this point.