Uncertainty Grips Markets As Optimism Wanes – IMF

The International Monetary Fund (IMF), has pointed out that market sentiment has deteriorated since earlier this year amid still elevated financial vulnerabilities and mounting concerns about risks to inflation.

The international financial institution has observed that though risks to global financial stability have remained contained, the economic optimism across the world was fading.

Tobias Adrian, the Financial Counsellor and Director of the Monetary and Capital Markets Department at IMF has explained that policy support for economic growth by the world’s central banks, finance ministries, and international financial institutions have increased to an unprecedented degree for a year and a half.

To this end, “the sense of optimism that had propelled markets in the first half of the year is at risk of fading,” he said

“In many advanced economies, financial conditions have eased since the initial months of the pandemic. Nonetheless, the sense of optimism that had propelled markets in the first half of the year is at risk of fading,” he emphasised.

He further elaborated that investors have become increasingly worried about the economic outlook, amid ever-greater uncertainty about the strength of the recovery, due to uneven vaccine access.

This uneven vaccine access, along with the mutations of the coronavirus, have led to a resurgence of infections, fuelling concerns about more divergent economic prospects across countries.

Additionally, inflation readings have been above expectations in many countries, and new uncertainties in some major economies have put markets on alert.

“Those uncertainties are triggered by financial vulnerabilities that could increase downside risks, surging commodity prices, and policy uncertainty,” Mr Adrian said.

Source: IMF

The situation, the IMF has said, required that global economies craft strategies that would enable them safely approach the next stage of monetary and fiscal policy action.

Policymakers have therefore been encouraged to ensure that monetary and fiscal policy support be more targeted and tailored to country-specific circumstances, given the varying pace of the recovery across countries.

Also, Central Banks would need to provide clear guidance about their future approach to monetary policy, aiming to avoid an unwarranted or abrupt tightening of financial conditions.

Policymakers in emerging and frontier markets should, where possible, begin to rebuild fiscal buffers and implement structural reforms.

Not only that, but monetary authorities have equally been asked to remain vigilant, and if price pressures turn out to be more persistent than anticipated, act decisively to avoid an unmooring of inflation expectations.

“Rebuilding buffers and implementing enduring reforms to boost economic growth prospects will be pivotal to protect against the risk of capital-flow reversals and an abrupt increase in financing costs,” the IMF underscored.

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