Global Financial Stability Report, October 2022: Navigating the High-Inflation Environment
Global Financial Stability Report, October 2022
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- Published: October 11, 2022
Overview: Rising global financial stability risks
- Financial stability risks have increased amid the highest inflation in decades and the ongoing spillovers from Russia’s war in Ukraine to European and global energy markets.
- Poor market liquidity raises the risk that a sudden, disorderly tightening in financial conditions may interact with preexisting vulnerabilities.
- Specific regional and sectoral vulnerabilities noted:
- Emerging markets: rising rates, weak fundamentals, and large outflows have pushed up borrowing costs, particularly for frontier economies, with a heightened risk of additional defaults.
- China: the property downturn has deepened as sharp declines in home sales have exacerbated pressures on developers, with heightened risks of spillovers to the financial sector.
- Europe: the energy crisis is contributing to a worsening outlook.
Chapter 1 — Financial Stability in the New High-Inflation Environment
- Focus: policy response of central banks to high inflation, risks of a disorderly tightening of financial conditions, and debt distress among emerging and frontier markets.
- Key findings:
- Markets have been extremely volatile.
- A deterioration in market liquidity appears to have amplified price moves.
- In emerging markets, rising rates, weak fundamentals, and large outflows have pushed up borrowing costs, particularly for frontier economies, with a heightened risk of additional defaults.
- In China, the property sector remains a key source of vulnerability.
- Implication: heightened probability of interactions between market liquidity strains and preexisting vulnerabilities, potentially producing disorderly tightening in financial conditions.
Chapter 2 — Scaling Up Private Climate Finance in Emerging Market and Developing Economies
- Focus: narrowing the climate financing gap in emerging market and developing economies.
- Key findings and arguments:
- Climate policies, including carbon pricing, climate disclosures, and transition taxonomies, are crucial for enabling private climate finance.
- Innovative financial instruments can help to scale up private climate finance and broaden the investor base.
- The public sector—including multilateral development banks—will have to play a key supporting role to provide risk-absorption capacity.
- The IMF can play a catalytic role through policy advice, surveillance, capacity development, and financing from its new Resilience and Sustainability Trust, which could help tackle longer-term structural challenges arising from climate change.
Chapter 3 — Asset Price Fragility: The Role of Open-End Investment Funds
- Focus: contributions of open-end investment funds to fragilities in asset markets.
- Key findings:
- Open-end investment funds play a key role in financial markets, but those offering daily redemptions while holding illiquid assets can amplify the effects of adverse shocks.
- Mechanisms of amplification include higher likelihood of investor runs and asset fire sales, contributing to volatility in asset markets and potentially threatening financial stability.
- These vulnerabilities could spill over to emerging markets and lead to a tightening of financial conditions.
- Policy recommendation:
- Policymakers should ensure that liquidity management tools are available, calibrated appropriately, and utilized by funds.
Key takeaways and policy priorities
- Monitor and manage interactions between high inflation, central bank responses, and market liquidity to reduce the risk of a disorderly tightening of financial conditions.
- Support emerging and frontier markets facing rising borrowing costs and debt-distress risks through targeted policies and international cooperation.
- Address sectoral vulnerabilities, notably in China’s property sector, to limit spillovers to the financial system.
- Scale up private climate finance via policy frameworks (carbon pricing, climate disclosures, transition taxonomies), innovative instruments, and public-sector interventions, with multilateral development banks and IMF mechanisms playing supporting roles.
- Strengthen liquidity management frameworks for open-end investment funds to mitigate run and fire-sale risks and contain potential cross-border spillovers.
Global Financial Stability Report, October 2022: Navigating the High-Inflation Environment
Content in this bundle
- Chapter 1 Data
- Chapter 3 Data
- Chapter 1
- Chapter 2 Online Annex
- Chapter 3
- Chapter 3 Online Annex
- Executive Summary
- Foreword
- Global Financial Stability Report — Key Highlights
- Full Report