CENTRAL BANKS WARNED AGAINST PREMATURE INTEREST RATE CUTS

MBABANE – The International Monetary Fund (IMF) has cautioned central banks, including that of Eswatini, to avoid premature monetary easing.

In its global financial stability report, the last mile: financial vulnerabilities and risks, the IMF said where progress on disinflation was enough to suggest that inflation was moving sustainably toward the target, central banks should then gradually move to a more neutral stance of policy.

Meetings

The aforementioned report was released last week during the spring meetings of the of the IMF and the World Bank Group, where the Minister of Finance Neal Rijkenberg, Ministe of Economic Planning and Development Dr Tambo Gina and the Central Bank of Eswatini (CBE) Governor Dr Phil Mnisi, among others were participants. It is worth noting that the CBE has maintained the interest rate unchanged at 7.50 per cent since July 2023. The next monetary policy meeting is scheduled for May 31, 2024 where the CBE is expected to give its decision on interest rate. The international organisation stated that quantitative tightening and the reduction in balance sheets needed to proceed with care. Central banks should carefully monitor market functioning issues and mobilise to address potential market stresses.

Ensuring that banks are prepared to access central bank liquidity and intervening early to address liquidity stress in the financial sector can mitigate financial instability. Given the potential risks of the fast-growing private credit market, authorities should consider a more proactive supervisory and regulatory approach. It is key to close data gaps and enhance reporting requirements to comprehensively assess risks. Authorities should also strengthen cross-sectoral and cross-border regulatory cooperation and make risk assessments consistent across financial sectors. A cybersecurity strategy can strengthen the cyber resilience of the financial sector, accompanied by effective regulation and supervisory capacity, as well as by improved reporting of cyber incidents.

Develop

Delivering critical services to address disruptions is crucial to limit potential damage to the financial system. Financial firms should develop and test response-and-recovery procedures to remain operational in the face of cyber incidents. Given the global nature and systemic implications of cyberattacks, cross-border coordination is crucial. IMF Directors called on central banks to ensure that inflation returns to target smoothly, by avoiding easing policy prematurely. They emphasised that the pace of monetary policy normalisation should remain data dependent, be tailored to country circumstances, and clearly communicated.

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