IMF Warns "Additional Interest Rate Hikes Pose Threat to Global Financial System" (Comprehensive)

"The financial system is being tested by stress triggered by monetary tightening policies."

As inflation remains stubbornly high and the credit crunch risk triggered by Silicon Valley Bank (SVB) adds to the mix, the International Monetary Fund (IMF) has warned that the ongoing interest rate hikes by countries around the world could pose a 'sudden risk' to the global financial system. The diagnosis is that, as pressure on the banking sector increases?like in the recent Credit Suisse (CS) case?the most vulnerable link will become the next target. Concerns about the commercial real estate (CRE) market were also reiterated.

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IMF Downgrades Growth Forecast... "Banking Sector Instability Reminds of Vulnerabilities"

In its World Economic Outlook (WEO) report released on the 11th (local time), the IMF lowered its global economic growth forecast for this year by 0.1 percentage points to 2.8%, citing persistently high inflation, ongoing interest rate hikes, and the impact of SVB-triggered tightening on the financial sector as future risk factors. Pierre-Olivier Gourinchas, IMF Chief Economist, stated, "The recent instability surrounding the banking sector crisis reminds us that the situation remains fragile," adding, "Downside risks continue to dominate, and the fog surrounding the global economic outlook has thickened."

One particularly notable point in this report is the warning about potential financial instability stemming from the SVB incident. The consecutive failures of SVB and Signature Bank earlier confirmed that the Federal Reserve's (Fed) rapid tightening could impact not only the real economy but also the financial system. Regarding this, Chief Economist Gourinchas warned, "Last year's rapid monetary tightening triggered significant losses in long-term bond assets and increased funding costs," adding, "The tests on the financial system will continue. As seen in the CS case, anxious investors will next look for the most vulnerable links." Specifically, he noted that financial institutions with excessive leverage, credit risk, and high reliance on short-term funding, as well as countries with weak fundamentals, could be the next targets.

In particular, this tightening financial environment is expected to directly hit the credit and fiscal conditions of emerging markets and developing countries, potentially triggering large-scale capital outflows. This will inevitably affect global growth overall. The IMF's diagnosis is that if the worst-case scenario materializes, the global economic growth rate could slow to as low as 1% this year. A 1% growth rate implies almost stagnant per capita income. The IMF estimates the probability of this scenario at 15%.

The fact that inflation is not falling as quickly as expected is also cited as a threat. In the economic outlook released that day, global inflation is projected to be 7% this year and 4.9% next year, down from 8.7% last year. These figures are 0.4 and 0.6 percentage points higher, respectively, than the January forecast. The IMF warned in the report that the inflation easing trend will not be as fast as expected, which could accelerate tightening by central banks worldwide and expose hidden vulnerabilities in the financial system.

If central banks, including the Fed, continue to raise interest rates to curb inflation, already vulnerable banks will inevitably face greater pressure and damage. Tobias Adrian, Director of the IMF's Monetary and Capital Markets Department, told major foreign media, "The financial system is being tested by stress triggered by monetary tightening policies," warning, "The risk going forward is that this situation could create more stress factors for the financial system." When asked whether concerns about contagion from the SVB banking crisis have now been contained, he replied, "So far, it has ended well, but significant vulnerabilities remain," adding, "There are still weak spots vulnerable to additional shocks."

"Financial Stability Risks Have Increased," Diagnosis Issued

The same concerns were confirmed in the IMF's Financial Stability Report released on the same day. The IMF diagnosed that global financial stability risks have increased due to ongoing tightening and the SVB incident.

According to the report, as lending conditions tighten and markets freeze due to the recent events, the lending capacity of U.S. banks is estimated to shrink by about 1% this year. This could reduce the U.S. Gross Domestic Product (GDP) by 0.44 percentage points. The report emphasized, "Regional and small U.S. banks account for more than one-third of total bank loans," adding, "Credit tightening can have significant impacts on economic growth and financial stability."

While the IMF acknowledged that reforms since the 2008 global financial crisis have generally strengthened the financial system, it did not ease its vigilance regarding recent banking sector crisis concerns. The key question posed by the IMF is whether these banking sector worries are a precursor to more systematic stress that will test the resilience of the global financial system.

The calculations for central banks, including the Fed, have become more complicated. The report stated, "(This incident) could have broad implications for central banks tasked with bringing down high inflation," diagnosing that "Central banks face a trade-off between fighting inflation and protecting financial stability." It also pointed out that, although central banks including the Fed are currently expected to pivot to policy easing sooner than previously anticipated, inflation remains at a level far above targets.

Concerns surrounding commercial real estate were cited as a factor that could further amplify these financial risks. The IMF noted that U.S. banks with total assets under $250 billion account for three-quarters of all bank loans to commercial real estate, diagnosing that significant repercussions are inevitable. The IMF pointed out, "The combination of high interest rates and structural demand declines for commercial real estate has increased the risk of widespread adjustments in commercial real estate valuations."

However, U.S. Treasury Secretary Janet Yellen assessed on the same day that the global economy is doing much better than expected in the second half of last year. While she remains cautious about global downside risks, she expressed optimism that the various risk factors should not be viewed too negatively.

Regarding the aftermath of the SVB bankruptcy, Secretary Yellen emphasized, "The U.S. banking system is sound and has sufficient capital and liquidity." She added, "Although risks remain, we are not expecting a recession," and noted that she has not yet seen evidence that the credit crunch is cooling U.S. economic activity.

This content was produced with the assistance of AI translation services.