Global Financial stability risks have increased
According to the International Monetary Fund, financial stability risks have increased and financial conditions have continued to tighten globally since its previous report from April 2022, amid the highest inflation in decades and extraordinary uncertainty about the economic outlook, extremely volatile markets and the persistence of geopolitical risks.
- In many advanced economies, financial conditions are tighter across the board. In some emerging markets they have reached levels last seen during the height of the COVID-19 crisis. In contrast, conditions have eased in China, as policymakers have provided additional support.
- Sovereign borrowers in developing economies and frontier markets should enhance efforts to contain risks associated with their high debt vulnerabilities. In emerging markets, rising rates, worsening fundamentals, and large outflows have pushed up borrowing costs notably. The impact has been especially severe for more vulnerable economies, with 20 countries either in default or trading at distressed levels.
- In China, the property downturn has deepened as sharp declines in home sales during lockdowns have exacerbated pressures on developers, with heightened risk of spillovers to the banking, corporate, and local government sectors.
- The housing market is still showing signs of overheating in many other countries and there is a risk of a sharp fall in house prices as mortgage rates rise, affordability falls, and lending standards tighten.
- Central banks must act resolutely to bring inflation back to target, to keep inflationary pressures from becoming entrenched, and to avoid de-anchoring of inflation expectations that would damage credibility. Ensuring effective transmission of monetary policy is crucial during policy normalization. Striking a balance between containing the build-up of vulnerabilities and avoiding procyclicality and a disorderly tightening of financial conditions is essential.
- Implementing policies to mitigate market liquidity risks is essential to avoid a possible amplification of shocks given the growing importance of non-bank financial institutions.