Market Speaks: IMF Says It Is Critical To keep Enhancing Macroprudential Policy Toolkit

9 Dec 2022 , 12:01 PM

According to Alfred Kammer, the Director of the European Department at the International Monetary Fund (IMF), global financial system is facing a challenging time. Russia’s war in Ukraine, the extreme rise in energy prices, high and persistent inflation, rapid monetary policy tightening, a slowdown in the US and China, the undoing of the peace dividend, and repricing of almost all financial assets – and the list goes on. However, the financial markets have functioned orderly and the European banking system remained strong in 2022. This is testimony to the quality of European regulators and supervisors. This is also a result of the reforms implemented since the global financial crisis, which included the introduction and widespread use of macroprudential policy tools. But the next years may prove more difficult still. While the IMF is only projecting a shallow recession for Europe for 2023, most risks are to the downside. It is critical to keep enhancing the macroprudential policy toolkit. If this toolkit is insufficient, a specter of a financial crisis may break down the separation between monetary and macroprudential policies, forcing a degree of “financial dominance” in policymaking. Not only monetary policy but also sound fiscal policy is important for the functioning of markets, as the recent British gilts market episode demonstrated. Markets can respond violently to unsustainable fiscal policies. There are other examples of fiscal policy that could impact financial stability, such as windfall taxes. The resilience of Europe’s financial system should not be taken for granted. The financial system withstood the pandemic and the war relatively well only thanks to hard, forward-looking work since the Global Financial Crisis by financial sector policymakers. Complacency is dangerous. Policymakers should see recent events as a wake-up call to prepare the financial system for whatever the future may hold.Powered by Commodity Insights