The head of the International Monetary Fund has warned of increased risks to the stability of the financial system after weeks of banking sector turmoil.
It comes as markets brace for another week of volatility following panic over the health of Deutsche Bank.
IMF managing director Kristalina Georgieva said uncertainty in the global economy remained ‘exceptionally high’ and 2023 was set to be ‘another challenging year’.
Global growth was set to slow to under 3 per cent as war in Ukraine, higher interest rates and long-term ‘scarring’ from Covid weighed on activity.
Georgieva told a conference in Beijing that chaos in banking markets was due to recent interest rate hikes. She said: ‘The rapid transition from a prolonged period of low interest rates to much higher rates – necessary to fight inflation – inevitably generates stresses and vulnerabilities, as evidenced by recent developments in the banking sector in some advanced economies.’
Despite this, Georgieva said policy-makers and central bankers had acted ‘decisively’ to counter risks to the financial system, but warned high uncertainty meant there was a ‘need for vigilance’.
It followed another dramatic episode for the banking sector at the end of last week.
Deutsche Bank shares tumbled amid fears it could be the next to fail, after an emergency takeover of Credit Suisse by Swiss rival UBS. It led German chancellor Olaf Scholz to alleviate concerns about Deutsche Bank, saying it was ‘very profitable’ and there was ‘no reason to be concerned’.
It remains to be seen whether the comments will be enough to calm market panic over the banking sector, which has been disturbed since the collapse of US lender Silicon Valley Bank (SVB) earlier this month.
Three US lenders have collapsed in March – SVB, Signature and Silvergate – while larger Wall Street rivals have pumped £25billion into San Francisco-based First Republic Bank to prevent more dominos from falling.
Georgieva also warned that rising geopolitical tensions risked splitting the world into rival economic blocs. She said this would leave ‘everyone poorer and less secure’ and the global economic outlook was ‘likely to remain weak’ over the medium term.