IMF says inflation reducing, calls for rebuilding fiscal buffers

“Inflation is expected to return to target in countries around the world while economic activity slows. But, we don't foresee a global recession in our baseline. And, so this optimistic scenario has really fuelled, asset valuations in recent months.” said IMF financial counsellor Tobias Adrian at a news conference for the IMF and World Bank Spring Meetings.

While economic growth in Europe and China has lagged, strong reports in the United States have led markets to question their predictions regarding timing and frequency of rate cuts by the US Federal Reserve, IMF said.

“Our forecast remains that, inflation will return to target. And our expectation is that the Federal Reserve is going to start, cutting at some point. But how many cuts and the exact timing is certainly data dependent,” said Adrian.

That strong American economy could lead to some distortions in the markets, as investors seek higher returns and safety of US investments. That might mean a higher dollar, and less funds for US partners or the developing world, IMF said in a release.

“The strength of the US economy also has positive spillovers on emerging markets such as, such as Mexico. So, demand from the US may be stronger. And the easing of financial conditions more broadly can also be transmitted. So the net effect can actually be positive or negative. So just looking at the exchange rate is probably not sufficient.” observed the Fund’s head of the monetary and capital markets department.

The report also noted that pandemic relief spending had left debt-to-gross domestic product ratios elevated in much of the world. IMF is urging countries to address this by rebuilding their fiscal buffers. But this could be more costly if the US interest rates and the dollar remains high.

Fibre2Fashion News Desk (DS)