The International Monetary Fund (IMF) stated on Tuesday that central banks throughout the world should take decisive action against inflation as a result of Russia’s invasion of Ukraine, which has increased global financial stability concerns.
“The severity of commodity market and supply chain disruptions is creating downside risks by weighing negatively on macrofinancial stability, inflation, and the global economy,” the global body cautioned in its most recent report.
Many central banks, according to the IMF, may need to go further and quicker than what is currently priced in markets to keep inflation under control.
“This could bring policy rates above neutral levels and this is likely to lead to even tighter global financial conditions,” it noted.
The body also underlined the importance of central banks in developed economies to provide clear guidance on the tightening process while remaining data dependent.
To emerging markets, it recommended that they should continue monetary tightening depending on individual circumstances to “preserve their inflation-fighting credibility and anchor inflation expectations.”
War creates medium-term structural problems
The report also emphasized that the war in Ukraine raised a number of medium-term structural problems that policy makers would have to face in the coming years.
It said these issues would include fragmentation in capital markets, which “would have implications for the role of the US dollar.”
“Payment systems face similar risks as central banks seek to establish their own digital currencies that are independent of existing international networks,” it noted.
Pointing out that the war demonstrated the urgency of reducing reliance on carbon-intensive energy and accelerating the transition to renewable energy, the report said trading volumes of crypto assets against some emerging market currencies increased after sanctions against Russia and capital restrictions in Russia and Ukraine.