Interest rates may be 'near the peak' of hiking cycle : IMF economist
The Fed's recent interest rate hike "severely tested" the financial sector, but most economies may "be near the peak of their hiking cycle," says IMF Chief Economist Pierre-Olivier Gourinchas. The IMF released its overall outlook for the global economy this morning, warning of a "hard landing" if inflation persists. Gourinchas joined Yahoo Finance's Jennifer Schonberger on Yahoo Finance Live, offering glimmers of hope and a general warning."The financial banking sector...is in much better health overall," Gourinchas said. But authorities need to be "careful and monitor" vulnerability issues, because "things could spread pretty quickly."
Looking ahead, Gourinchas says there's no real indication interest rates will need to "hike massively," but central banks shouldn't be taking a step back. It's important to take into consideration the "financial fragility" of the sector, Gourinchas says, noting that cautious lending from banks will weigh down activity and help cool down inflation. But what's really important? Gourinchas stresses not to "veer away from the fight against inflation" for financial stability reasons. There are other tools available to authorities when it comes to addressing localized pockets of vulnerability - that doesn't require "adjusting the rate or giving up on inflation."
Key Video Moments:
00:00:46 - Banking sector in "much better health"
00:01:13 - Important to monitor "pockets of vulnerability"
00:01:40 - Banks may be near the "peak" of rate hiking cycle
00:02:13 - Banks will be more cautious with lending, will weigh down sector
00:02:37 - Banks should not "veer away" from inflation fight
To our full interview with IMF Chief Economist Pierre-Olivier Gourinchas, click here.
Video Transcript
JENNIFER SCHONBERGER: Pierre, how would you characterize global stability right now? Do you think that these bank failures are isolated, or they are a harbinger of more challenges, tighter credit conditions to come? Is there contagion risk here?
PIERRE-OLIVIER GOURINCHAS: Well, certainly, the markets have been quite nervous in the last few weeks. And the financial sector has been severely tested by the increase in interest rates we've had in the last year. And that has generated losses for banks' balance sheets and non-banks as well, as we saw last fall, and also increased funding costs for banks, as they are now-- depositors are looking at how much they're earning on their deposit accounts or savings account. And they are asking, maybe, well, we should get a little bit more. And so that is a concern going forward.
Now, the good news is that the financial-- the banking sector, in particular, is in much better health overall now than it was at the time, say, of the global financial crisis. There's a lot more capital. The banks are better regulated. There are all kinds of liquidity requirements, et cetera, especially for large banks. And so, overall, the health of the banking sector is much stronger. But it doesn't mean that there couldn't be pockets of-- liquidity pockets of vulnerabilities. And financial authorities need to be quite careful and monitor this because things could spread pretty quickly.
JENNIFER SCHONBERGER: Yeah, well, to your point, how should central banks sort of walk this tightrope between managing inflation risk and the potential for credit tightening or liquidity issues? Do you think they should take a step back, like the Bank of Australia did, sort of pause and see, or continue on their way?
PIERRE-OLIVIER GOURINCHAS: At this point, we don't think they should take a step back. I mean, first, let's realize that most advanced economies' central bank may already be near the peak of their hiking cycle. So a lot has already been done. And then we should see the effect of that in coming months and the rest of the year. So there isn't really any indication that central banks would need to hike massively from where they are right now. Of course, there's always a risk that inflation might be a bit more persistent. But even then, I don't think anyone is anticipating very, very sharp increase in policy rates.
But having said that, the second factor to take into account is this financial fragility is going to lead probably the banks to be a little bit more cautious in extended lending. And so they are going to contract lending going forward. How much is still to be determined. We don't know quite yet. But that's also going to weigh down on activity. That's going to cool off the economy, bring down inflation. And what that means is that central banks don't need to do as much because the lending sector is going to be doing some of it for them.
But what's really important at this point is that central banks should not veer away from the fight against inflation for financial stability reasons. We don't think that would be appropriate. There are other tools that are available to financial authorities that need to address localized pockets of vulnerability and that doesn't require adjusting the policy rates or giving up on the fight against inflation.
