The IMF is warning of a period of ‘extreme volatility’ in financial markets in the latest Global Financial Stability Report released Tuesday (October 11) in Washington, D.C.

The global fallout of the highest inflation in decades, the impact of Russia’s war on Ukraine and the property downturn in China could amplify risks in the financial system as a whole said Tobias Adrian, Financial Counsellor and Director, IMF Monetary and Capital Markets Department.

“Markets have been extremely volatile. Risk assets, such as equities and corporate bonds have declined sharply. A deterioration in market liquidity has amplified price moves, and financial conditions have tightened globally in many advanced economies. Financial conditions are now tight by historical standards. In some emerging markets, they have reached levels last seen during the height of the COVID 19 crisis,” said Adrian.

Tobias Adrian, IMF Monetary and Capital Markets Department Chief warned of the challenges ahead for the Bank of England.

“With the expansionary fiscal policy, the Bank of England would have to raise interest rates that much more in order to contain inflation and to get inflation back to the mandated objective. So, you know, one part of the answer to the question is, yes, the shift of fiscal policy would certainly change the trajectory. Now, you were asking, is that the only way to change the trajectory in yields? And as you saw in the recent past two weeks, asset purchases can also change yields in the marketplace. But of course, the Bank of England has the inflation price stability objective, and that is going to stand in the way of permanently having lower interest,” said Adrian

The report also highlighted the slowing property market in China.

“We have seen stress in the Chinese property market, of course, compared to recent years. The growth rate in China has been declining to some degree and that is one contributing factor to the slowing of the property market. But also, of course, there has been a lot of investment in properties over many years. And so that has also led to a demand and supply imbalance and in some regions, in some cities. So when we look at property, developing country companies in particular, their stock and bond prices have been declining as the prospects for sales going forward, for example, have been readjusted. So sales have been declining steadily,” said Adrian.

Adrian also described the current economic outlook as being very severe, and commented on the impact the UK’s problems are having on other countries.

“We are in the worst quintile here. So the only times where things were worse was in times of acute crisis, such as the euro crisis, the global financial crisis, or the 2020 COVID crisis. So in that sense, you know, we are certainly at a distressed moment. But again, the baseline is one where things continue to be orderly. Now, in terms of spillovers from the UK to other countries. So we have of course seen that the yield movements that are correlated to some degree, but we haven’t seen the kind of dysfunction spill over into other markets to date,” said Adrian.

To see the full report: http://www.IMF.org/GFSR-Oct22