International Monetary Fund has said that rising inflation has become the number one enemy of the global economy urging Central Banks to put their act together to tame it. In its In its global financial stability risk assessment it advised Central Banks across the globe that they “must act resolutely to bring inflation back to target, keeping inflationary pressures from becoming entrenched and avoiding de-anchoring of inflation expectations that would damage credibility. The high uncertainty clouding the outlook hampers the ability of policymakers to provide explicit and precise guidance about the future path of monetary policy. But clear communication about their policy reaction functions, their unwavering commitment to achieve their mandated objectives, and the need to further normalise policy is crucial to preserve credibility and avoid unwarranted market volatility.
According to the IMF’s Integrated Policy Framework, where appropriate, some emerging market economies managing the global tightening cycle could consider using some combination of targeted foreign exchange interventions, capital flow measures, and/or other actions to help smooth exchange rate adjustments to reduce financial stability risks and maintain appropriate monetary policy transmission. Sovereign borrowers in developing economies and frontier markets should enhance efforts to contain risks associated with their high debt vulnerabilities, including through early contact with their creditors, multilateral cooperation, and support from the international community. Enacting credible medium-term fiscal consolidation plans following the recent shocks could help contain borrowing and refinancing costs and alleviate debt sustainability concerns. Policymakers should contain further buildup of financial vulnerabilities.
“While considering country- specific circumstances and the near-term economic challenges, they should adjust selected macro prudential tools as needed to tackle pockets of elevated vulnerabilities. Striking a balance between containing the buildup of vulnerabilities and avoiding procyclicality and a disorderly tightening of financial conditions is important given heightened economic uncertainty and the ongoing policy normalisation process. Implementation of policies to mitigate market liquid- ity risks is paramount to avoid possible amplification of shocks. Supervisory authorities should monitor the robustness of trading infrastructures and support transparency in markets. In addition, improving the availability of data at the trade level would help with timely assessment of liquidity risks. Given the increas- ing importance of nonbank financial institutions, coun- terparties should carefully monitor intraday activity
and leverage exposures, strengthen their liquidity risk management practices, and enhance transparency and data availability.
“Scaling up private climate finance will require new finance instruments and the involvement of multilateral development banks to attract private investors, leveraging private investment and strengthening risk absorption capacity. A larger share of equity financing and additional resources for climate finance from multilateral development banks would help countries achieve these objectives. The IMF can help its members address climate change challenges by undertaking financial stability risk assessments, lending through its new Resilience and Sustainability Trust, and advocating for closing data gaps and disclosures. Policy action is warranted to mitigate vulnerabilities and risks associated with open-end investment funds. Price-based liquidity management tools such as swing pricing can be effective in lowering asset price fragilities but policymakers should provide further guidance on their implementation. Additional tools could include linking the frequency of redemptions to the liquidity of funds’ portfolios. Policymakers should also consider tighter monitoring of funds’ liquidity risk management practices, additional disclosures by open-end funds to better assess vulnerabilities, and measures to bolster the provision of liquidity”.
