International Monetary Fund (IMF) Chief Economist Pierre-Olivier Gourinchas recently told CNBC that the global economy continues to face severe challenges to growth. Despite an array of downside risks, however, he urged policy makers to continue to use the tools they have to focus on inflation.
According to Gourinchas, who spoke to CNBC on Tuesday, rising interest rates have had a profound effect on the banking industry, increasing their vulnerability. Moreover, the industry’s reaction to those rate increases could have a serious impact on economic growth in countries around the world. He suggested two hypothetical scenarios—one in which conditions cause banks to tighten lending, and another more severed possibility in which authorities are unable to contain financial instability.
He suggested that the latter scenario could cause massive disruption in capital flows and a loss of economic and financial confidence. Gourinchas asserted that this scenario could result in world economic growth plummeting to around one percent for 2023.
Gourinchas also said that recent central bank interest rate hikes have added to the banking industry’s funding costs at a time when many banks are experiencing asset losses. He noted that those banks have “cushions” that can help them soften their risk but warned that many are likely to become more risk-averse when it comes to lending.
The economist also acknowledged that the current debate is now focused on balancing financial stability and a continuing focus on inflation. According to him, financial authorities have been adept at managing recent instances of instability, and he expects that they can manage others should they arise. That confidence in policy makers’ ability to use their existing tools may help to explain the IMF’s recommendation that monetary policy continue to focus on inflation for the immediate future.
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