THE International Monetary Fund (IMF) on Tuesday painted an uncertain outlook for the global economy as higher interest rates cool growth. Still the fund told central banks to stay the course in the inflation fight even as it raised concern about the impact rising interest rates is having on the global financial sector.

“The massive and synchronised tightening of monetary policy by most central banks is starting to bring inflation back towards its targets,” Pierre-Olivier Gourinchas, the IMF’s chief economist, told journalists at the first in-person Spring Meetings at its Washington-based headquarters since 2019 due to the coronavirus pandemic. “At the same time, serious financial stability related downside risks have emerged,” Guorinchas continued in obvious reference to the collapse of two banks in the US and the forced takeover of Credit Suisse in Europe.

The Bank of Jamaica in a press release recently said, “No Jamaican financial institution currently has any major exposures to the failed banks,” while it assures that the domestic financial system…remained well capitalised and is able to meet liquidity needs.

But that the higher interest rates are having consequences beyond the inflation fight is an outcome the IMF seemed to have anticipated. “We have repeatedly warned this would not be an easy ride,” Gourinchas said.

And though he praised the central banks and fiscal authorities for quickly dealing with issues in the financial sector in the US and Europe, Gourinchas worries that higher interest rates could bring more instability in the global financial market.

“The financial system may well be tested even more. Nervous investors often look for the next weakest link, as they did with Credit Suisse….Financial institutions with excess leverage, credit risk or interest rate exposure, too much dependence on short term funding, or located in jurisdictions with limited fiscal space could become the next target, so could countries with weaker perceived fundamentals.”

He said though monetary policy should remain focused on bringing inflation down, the monetary authority should “stand ready to adjust broadly as financial developments might demand.” Regulators and financial market supervisors are also being told to strengthen oversight so that “financial fragilities don’t morph into a full blown financial crisis.”

Yet, Gourinchas called on central banks “to tighten further or to stay tighter for longer than currently anticipated” as he outlined that “inflation is much stickier than anticipated even a few months ago.”

The IMF said global inflation this year is expected to reach 7 per cent down from 8.7 per cent last year, reflecting mostly the sharp reversal in energy and food prices. It, however, said core inflation, excluding energy and food prices, has still not peaked in many countries,” despite a year of rising interest rates to rein in price increases.

“At this point in the tightening cycle, we would expect to see more signs of output and employment softening. Instead, both output and inflation estimates have been revised upwards for the last two quarters, suggesting stronger than expected global demand,” Gourinchas said.

But he said global growth will bottom out at 2.8 per cent this year, before rising modestly to 3 per cent next year.

The forecast is down slightly from what it was in January when the IMF said global growth would touch 2.9 per cent this year. For Jamaica, the forecast remains unchanged for this year at 2.3 per cent. That is a slowdown from the 5.2 per cent expansion the Statistical Institute of Jamaica believes the country grew last year. Statin’s data are preliminary and are higher than the IMF forecast that Jamaica’s economy would expand by 4 per cent in 2022.

Jamaica aside though, the fund said the possibility of a “hard landing”, in which rising interest rates weaken growth so much as to cause a recession, has “risen sharply”, especially in the world’s wealthiest countries.

A recession in the United States could spell bad news for Jamaica especially if American tourists who make up more than 70 per cent of arrivals to the island cut back on vacations or if consumers in the country’s main trading partners buy fewer Jamaican products.

“This year slowdown is concentrated in advanced economies, while growth is expected to fall to 1.3 per cent this year, before increasing modestly next year. By contrast, emerging market and developing economies are already pushing ahead in many cases with year end growth accelerating to 4.5 per cent this year from 2.8 per cent last year.

A silver lining is that the contraction in bank lending due to higher interest rates could partially mitigate the need for further monetary policy tightening but any expectation that central banks will prematurely surrender the inflation fight would have the opposite effect…and ultimately complicating the task of central banks.