April 12, (THEWILL) – The International Monetary Fund (IMF) Financial Counsellor and Director of the Monetary and Capital Markets Department, Tobias Adrian, has predicted that interest rates may remain high for some time as central banks battle with risks that threaten financial stability across the globe.
Adrian made this prediction while speaking at a press briefing, entitled ‘Global Financial Stability Report’ at the ongoing IMF/World Bank Group (WBG) Spring meetings in Washington.
Adrian said that central banks had to raise interest rates in response to threats to financial stability which became stronger between the last IMF/WBG Annual Meetings in October 2022, and now.
He defended central banks for taking the approach in order to ensure financial sustainability and contain inflation which has been on the rise for some time..
He assured that central bank managers are capable of dealing with the situation, citing examples of the US, Switzerland and the UK where there has been a turmoil in the banking sector which reflects the heightened vulnerabilities of the financial services institutions and how it was contained.
“We have seen turmoil in the banking sector in the US and in Switzerland. That reflects the heightened vulnerabilities that have been building up over years of low interest rates.
“While interest rates are being raised, vulnerabilities are still appearing, as we already saw last October when we met here for the Annual Meetings.
“We also saw stress in the non-banking financial sector, in the UK most specifically, as we have seen in the US banking sector in March,” he said.
Adrian said there are other vulnerabilities out there and sharp adjustments in the interest rates were necessary in the expectation that these could trigger further stresses.
According to the IMF boss, one of the key lessons from both the March and the October episodes is that while there are vulnerabilities that can be triggered and can threaten sustainability, there are also policy tools that are available to policy makers in central banks and in depository agencies as well as finance ministries.
“What we have seen is that these policy tools have been deployed in a very effective manner so that any threat to financial stability must be detected and contained very, very quickly.
“So, vulnerability is out there, but there are also many tools to contain risks to financial stability,” he asserted.
On how to contain inflation and curb financial stability risks together, he expressed confidence that central banks have the capacity to deal with the challenges in order to avoid any hurt to financial stability.
“What is happening in the past months is quite thrilling in that respect. Central banks will always try to use tools separately to fight inflation via monetary policy and to ensure financial sustainability via other tools.
Citing the steps taken in the US, Switzerland and the UK, Adrian said, “There is a tool that is ideal where there are financial system stability issues – using targeted tools to address those issues and continue to use monetary policy to fight inflation.”
He noted that inflation remains high well above targets in many countries, suggesting that central banks will adopt further tightening policies in the days ahead
Sam Diala is a Bloomberg Certified Financial Journalist with over a decade of experience in reporting Business and Economy. He is Business Editor at THEWILL Newspaper, and believes that work, not wishes, creates wealth.
