Upside risks for inflation sizable, central banks must stay resolute: IMF's Gita Gopinath

Brasilia [Brazil], May 18 : Price pressures seem entrenched in many economies, including emerging markets, and upside inflation risks are sizeable, said Gita Gopinath, First Deputy Managing Director at International Monetary Fund (IMF), adding that central banks must keep their monetary policies tight.

Gopinath was addressing the Annual Conference of the Central Bank of Brazil in Brasilia on Wednesday (local time).

"...markets are probably too optimistic about what it will take to bring down inflation in EMs. Despite encouraging signs, I am worried that price pressures seem entrenched in many economies and that upside inflation risks are sizeable," she said at the conference.

Hence, she said central banks must remain resolute in keeping policies tight and recognize that insufficient monetary tightening now may necessitate even more painful actions down the road - a lesson from the high inflation period of the 1970s that very much applies today.

"Fiscal restraint can help support the fight against inflation by central banks. And financial toolsjudiciously usedcan improve trade-offs in the event of pronounced financial stress."

She stressed on the fact that challenges are global, but are more heightened for emerging markets. Hence, it is critical for emerging market authorities to refine and strengthen their monetary, fiscal, and financial policy frameworks.

However, there is a silver lining for the emerging markets as they have thus far proven resilient to their own policy tightening and tightening by advanced economies, where rates have risen at the sharpest pace in several decades.

The US central bank's current policy rate, which is now in a target range of 5.0-5.25, is the highest in several years, and notably, it was near zero in the early part of 2022. Raising interest rates typically helps in cooling demand in the economy and thus helps in managing inflation.

Growth in emerging markets remained strong through last year and is expected to hold up reasonably well this year, while capital outflows have been limited, Gopinath added.