IMF warns of possible market correction due to interest rate hikes

The rises of interest rates by major central banks could trigger corrections in global stock markets, warned the International Monetary Fund (IMF), highlighting signs of “overvaluation” of some assets.

“This is the year in which the main central banks, including the US Federal Reserve (Fed), are going to correct their highly accommodative monetary policies”, declared Gita Gopinath, brand new number two of the IMF.

Although this “is necessary, given the strength of the recovery in the United States and the inflationary pressures that we are seeing”, the question is how much these rates are going to increase and at what pace, he pointed out at a press conference on the update of the latest IMF economic projections.

“There is a lot of uncertainty,” Gopinath acknowledged. “All of this affects the markets and adds to other events, such as the geopolitical tensions that we are seeing around the world.”

The IMF has long warned that markets appear overvalued.

Already in January 2021, he pointed to the “persistent disconnect” between the markets that are betting on a sustainable economic recovery and continued political support, and the reality of a global economy still heavily affected by the pandemic, declared in March 2020.

He highlighted “vulnerabilities” such as the increase in corporate debt, the fragility of non-bank financial institutions, the increase in sovereign debt and, in parallel, extremely high prices in the technology sector, for example.

“There is a high level of exuberance,” said Gopinath, until now the IMF’s chief economist who has just taken over as deputy managing director of the institution, said Tuesday.

Between the beginning of April 2020 and the end of 2021, the tech-heavy Nasdaq index has more than doubled. But since its peak in mid-November, it has lost more than 15%.

“One would expect that as interest rates go up, we will see corrections in the markets,” Gopinath said, confident that this “remains orderly.”

As long as Fed officials “explain why they’re taking the actions they’re taking, that should certainly help to have a more orderly market correction,” he said.