The International Monetary Fund has warned of further selling in the market as central banks try to tackle rising inflation and ease pandemic stimulus.
Market participants had started the year on an optimistic footing, predicting some economic momentum thanks to an easing of Covid-19 restrictions, which would likely give equities a boost. However, since Russia’s unprovoked invasion of Ukraine on February 24, this outlook has deteriorated, with further supply chain shocks and rising energy prices.
“There is definitely a risk of further selling,” Tobias Adrian, director of monetary and capital markets at the IMF, told CNBC on Tuesday.
“The intended consequences of monetary tightening are to tighten financial conditions to slow economic activity and I wouldn’t be surprised if we were to see some readjustment in asset valuations going forward and that could be in stock markets as well than in corporate, bond and sovereign markets,” he added.
The Fund’s warning comes at a time of great uncertainty for some of the major central banks.
The US Federal Reserve plans to raise interest rates six more times in 2022, while the European Central Bank confirmed last week that it was ending its asset purchase program in the third quarter.
However, this monetary tightening could be accelerated if inflation remains high, which could have an impact on market movements. The Eurozone, for example, recorded another record level of inflation last month at 7.5% on an annual basis; and the United States reported their highest consumer prices since 1981.
“There is a growing risk that inflation expectations will drift away from the central bank’s inflation targets, prompting a more aggressive tightening response from policymakers,” the IMF said in its latest Outlook report on Tuesday. the world economy.
In its latest economic assessment, the IMF said high inflation would last longer than expected. It also estimates that the inflation rate will reach 7.7% in the United States this year and 5.3% in the euro zone.