IMF is warning of further market sell-offs as central banks adjust policy

April 21, 2022: -The International Monetary Fund ( IMF ) is warning of more market sell-offs as central banks try to combat higher inflation and ease back on pandemic stimulus measures.

Market players are starting the year on an optimistic footing, which predicts a few economic momenta on the back of an easing of Covid-19 restrictions, such as boosting stocks. Although, since Russia’s unprovoked invasion of Ukraine on February 24, that outlook has worsened with further supply chain shocks and energy price increases.

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

“The intended consequences of monetary tightening are to tighten financial conditions that slow down economic activity, and I would not be surprised if we were to see a few amounts of readjustment of asset valuations going forward, and that could be in equity markets and incorporate bond markets and sovereign markets,” he added.

The Fund’s warning comes at high uncertainty for some key central banks.

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

Although, this monetary tightening could be accelerated if inflation remains high, impacting market moves. The eurozone, for instance, registered another record level in inflation numbers in the previous month, at 7.5% on an annual basis; and the U.S. reported its most significant consumer price figures since 1981.

“The risk is growing that inflation expectations drift away from central bank inflation targets, prompting an aggressive tightening response from policymakers,” the IMF said on Tuesday in its latest World Economic Outlook report.

In its most latest assessment, the IMF said high inflation would be around for longer than previously anticipated. It is also estimated the inflation rate will reach 7.7% in the U.S this year and 5.3% in the eurozone.