Report from Washington

24 April 2023 Blog

On the evidence so far, it is too early to start planning for a pause in our tightening of policy.

Every six months I join central banking colleagues, Ministers, government officials, civil society representatives, business executives and academics from across the world at the International Monetary Fund to discuss issues affecting the global economy. The backdrop to the latest meeting (two weeks ago) was the turbulence in global – especially US – financial markets and the analysis by IMF staff of the risks from “geoeconomic fragmentation”. Not surprisingly, the discussions included topics that were on the agenda six months ago (in particular Russia’s war in Ukraine and the need to tackle inflation with fiscal policy supporting that aim and not making it harder to achieve).

Recent financial turbulence 

The financial system is facing challenges, some of which are a result of the necessary global monetary policy tightening to tackle inflation and other historical issues within some financial institutions. The Irish and euro area banking sector has shown itself to be resilient in the current market environment thanks to strong capital and liquidity positions. 

Since the failures of Silicon Valley Bank, Signature Bank and Silvergate Bank in the US (and the loss of market confidence in Credit Suisse), we have been focused on potential financial stability implications, including the possible indirect effects and channels of contagion. These events have highlighted the challenges posed by the interaction between tighter monetary and financial conditions and the build-up of vulnerabilities. 

The capacity of the Irish banking system, and the European system, to absorb losses is much larger than it was in advance of the 2008 crisis due to the significant regulatory and supervisory changes that have been introduced and increased the resilience of the domestic financial system. 

However, as the financial system continues to both change and grow at pace, the increasing complexity creates additional channels of risk transmission. In particular, risks in the non-bank sector may arise from liquidity mismatch and leverage, which could adversely affect market conditions should these risks materialise. Given the high levels of interconnectedness of the non-bank sector, these vulnerabilities can spill over across jurisdictions. 

It is important that policy decisions are taken that help build resilience by reducing liquidity mismatch, mitigating risk from non-bank financial sector leverage, and enhancing liquidity preparedness in the broader non-bank financial sector.  The Central Bank of Ireland is playing a leadership role in the global efforts in this area.

Growth and inflation

Although the global economy has proven more resilient than what was expected at last October’s meeting, the IMF’s latest World Economic Outlook projects considerably higher and stickier levels of inflation and contains the “lowest medium-term projections in decades”. The IMF forecasts that global inflation will fall to 7 per cent in 2023 and has signalled that returning to target is unlikely before 2025 in most cases. 

The sluggish outlook reflects the tight policy stances needed to bring down inflation, the fallout from the recent deterioration in financial conditions and, of course, the war. Downside risks include a severe tightening of global financial conditions, sharper monetary policy impact amid high debt, stickier underlying inflation, and systematic sovereign debt distress in emerging markets and developing countries.  According to the IMF, the chances of a “hard landing” have risen sharply and central banks should remain steady on their stance to tackle persistently high inflation (but also be ready to adjust and use the full set of policy instruments to address financial stability concerns if required).

I spoke recently about my views on current inflation and the near term path for monetary policy. Our recent decisions represent a significant tightening of the monetary policy stance, commensurate to the significant challenges to price stability we have been facing. We will be making our next policy decision in just over a week’s time and will be especially focused on incoming data. But on the evidence so far, it is too early to start planning for a pause in our tightening of policy.  Indeed, and again based on the evidence we have to-date, rates will need to continue at restrictive levels to help re-set the balance between supply and demand in the economy and bring down inflation.


Uncertainty continues to dominate the macroeconomic outlook. The recent financial turbulence has shown that vulnerabilities exist across both bank and non-bank financial institutions and underline the importance of robust capital and liquidity buffers to be in place to ensure the system remains resilient.  And as central bankers, we will continue our fight against high inflation to ensure that we return to our target.

One of the major shifts discussed at the IMF meetings, namely the fragmentation of the global economy, has potential far-reaching consequences. As President Lagarde and my fellow Governor, Klaas Knot (at the last week’s Whitaker Lecture), have said, we are probably only at the start of events that could play out over many years.It’s a topic that I plan to return to in a future blog.

Gabriel Makhlouf

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