By Ketki Saxena
Investing.com --The International Monetary Fund (IMF) has warned that it remains too soon to sound the all-clear after recent banking turmoil, and that despite a tempering of investor anxieties, markets remain fragile and stressed.
According to the IMF's semi-annual Global Financial Stability Report released on Tuesday, bank breakdowns were symptomatic of vulnerabilities lurking under the surface for years within the global financial system. The risks are now being exposed by an aggressive tightening of credit by central banks worldwide to fight decades-high inflation.
"The rapid pace of policy tightening is causing fundamental shifts in the financial risk landscape," the report noted. "Asset allocations, asset prices, and market conditions are adjusting, challenging market structures, investors and institutions."
Authorities have taken extraordinary measures to contain contagion, such as guaranteeing all deposits at Silicon Valley Bank or Signature Bank, or Swiss authorities engineered a "shotgun marriage" - the Credit Suisse (SIX:CSGN) Group AG's takeover by UBS Group AG (SIX:UBSG).
However, these efforts may not be enough if further stresses intensify; central banks now face an even more precarious difficult trade-offs between fighting inflation while being forced to cut interest rates and ensuring stability.
"Policymakers should act swiftly even if that means cutting interest rates", the report noted.
In addition, the IMF warned that "Stress in the banking sector will likely weigh on broader lending conditions and thus economic growth." Recent sharp declines in bank stocks might lead to cutbacks in credit that lop almost a half percentage point off growth in the US and Euro area, according to fund estimates.
Senior IMF official Tobias Adrian further suggested investors may be too complacement about the risks to the outlook, with equity valuations stretched particularly within America.
The IMF released this report shortly after publishing an update of its World Economic Outlook where it trimmed global growth projections due to high uncertainty and risks as financial-sector stress, monetary policy, and the continued Russian invasion of Ukraine.