Near-term global financial risks are contained, but monetary policy easing could fuel asset price bubbles and markets might be underestimating risks posed by military conflicts and impending elections, the International Monetary Fund said on Tuesday.
In its semi-annual Global Financial Stability Report, the IMF warned that a “widening disconnect” between escalated geopolitical uncertainty and low market volatility increases the chance of a market shock similar to the gyrations seen in August when a Bank of Japan interest rate hike sparked massive de-leveraging.
“Buoyant credit and equity markets also seem undeterred by a slowdown in earnings growth and the continued deterioration in more fragile segments of the corporate and commercial real estate sectors,” the Washington-based multilateral lender said.
It also flagged that while monetary easing by most other major central banks was creating “accommodative” financial conditions, interest rate cuts could stoke lofty asset valuations, a global rise in private and government debt, and non-bank leverage.
“These mounting vulnerabilities could amplify adverse shocks, which have become more probable due to elevated economic and geopolitical uncertainty amid ongoing military conflicts and the uncertain future policies of newly elected governments,” it wrote.
While central banks in many other jurisdictions are embracing monetary easing to stimulate growth, Nigeria’s Central Bank recently took a different course by raising its Monetary Policy Rate (MPR). The bank’s Monetary Policy Committee (MPC) voted unanimously to increase the MPR by 50 basis points, bringing it to 27.25 per cent.
This decision stands in stark contrast to the global trend, where most central banks are reducing interest rates to boost economic activity. Many analysts had predicted that, at most, the Central Bank of Nigeria (CBN) would maintain the current rate, aligning with international moves towards lower interest rates. However, Nigeria’s apex bank adopted a more aggressive, hawkish stance, underscoring its focus on curbing persistent inflationary pressures within the country.
This policy adjustment is particularly striking given the broader expectation of loosening financial conditions across global markets. Yet, the CBN’s decision reflects its commitment to stabilizing prices and addressing the inflationary challenges that have long plagued the Nigerian economy. The move has sparked considerable discussion within financial circles, with many observers expressing surprise at the timing and magnitude of the rate hike.
Ultimately, this decision reaffirms the CBN’s prioritization of inflation control, despite the potential trade-offs in terms of economic growth. The choice to tighten monetary policy at a time when other nations are opting for stimulus measures signals the bank’s resolve to tackle domestic economic concerns, even as external conditions shift towards easing.
The report was released as global finance chiefs gather in Washington for the IMF and World Bank annual meetings during one of the most geopolitically and economically uncertain periods for the world in decades.
In addition to the war in Ukraine and an escalating conflict in the Middle East, half the world’s population has elected or will elect new governments in 2024, including the U.S., the IMF noted. In many cases, those new leaders’ policy plans are unclear but will carry significant economic consequences.