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IMF Warns of Further Market Sell-Offs as Central Banks Adjust Policy

Source: NYSE
  • Since Russia's unprovoked invasion of Ukraine the outlook has worsened — notably with further supply chain shocks and even higher inflation.
  • The Fund's warning comes at a time of high uncertainty for some of the key central banks.
  • Monetary tightening could be accelerated if inflation remains high, which could impact market moves.

The International Monetary Fund has warned of more market sell-offs as central banks try to combat higher inflation and ease back on pandemic stimulus measures.

Market players had started the year on an optimistic footing, predicting some economic momentum on the back of an easing of Covid-19 restrictions, which would likely provide a boost to stocks. However, since Russia's unprovoked invasion of Ukraine on Feb. 24 that outlook has worsened — with further supply chain shocks and energy price rises.

"There is certainly a risk of further sell-offs," Tobias Adrian, director for monetary and capital markets at the IMF, told CNBC Tuesday.

"The intended consequences of monetary tightening is to tighten financial conditions to slow down economic activity and I would not be surprised if we were to see a certain amount of readjustment of asset valuations going forward and that could be in equity markets as well as in corporate bond markets and sovereign markets," he added.

The Fund's warning comes at a time of high uncertainty for some of the key central banks.

The U.S. Federal Reserve expects to hike interest rates six more times in 2022, while the European Central Bank confirmed last week it is ending its asset purchase program in the third quarter.

However, this monetary tightening could be accelerated if inflation remains high, which could impact market moves. The euro zone, for instance, registered another record level in inflation numbers last month at 7.5% on an annual basis; and the U.S. reported its highest consumer price figures since 1981.

"The risk is rising that inflation expectations drift away from central bank inflation targets, prompting a more aggressive tightening response from policymakers," the IMF said Tuesday at its latest World Economic Outlook report.

In its latest economic assessment, the IMF said high inflation will be around for longer than previously anticipated. It also estimated the inflation rate will reach 7.7% in the United States this year and 5.3% in the euro zone.

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