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  HOME | Business & Economy (Click here for more)

IMF Sees Big Financial Bubble Forming after Years of Monetary Stimulus

WASHINGTON – The International Monetary Fund on Wednesday warned against complacency amid the current optimistic global economic outlook, stressing the need to address rising medium-term vulnerabilities, including risks associated with increasing asset valuations and higher leverage.

“While the waters seem calm, vulnerabilities are building under the surface,” IMF Monetary and Capital Markets Department Director Tobias Adrian said in presenting the organization’s latest Global Financial Stability Report, adding that “if left unattended these could derail the global recovery.”

The vulnerabilities are particularly problematic in a context in which the process of normalizing monetary policies will likely take several years, according to Adrian.

The report said central banks must perform a delicate balancing attack in moving away from the unconventional monetary policies and quantitative easing of recent years.

“Abrupt or ill-timed shifts could cause unwanted turbulence in financial markets and reverberate across borders and markets. Yet the prolonged monetary support envisaged for the major economies may lead to the buildup of further financial excesses,” it predicted.

The United States Federal Reserve has launched a gradual process of monetary tightening, carrying out several interest rate hikes since December 2015 that have left its benchmark rate at a current target range of between 1 percent and 1.25 percent.

The European Central Bank, meanwhile, has continued to forge ahead with its 2.3-trillion-euro bond-buying program to support that region’s economic recovery, although it is expected to announce a wind-down of that program later this month.

The IMF also addressed the size, complexity and pace of growth in China’s financial system, saying that they “point to elevated financial stability risks.”

The Washington-based institution said concerns about leverage were particularly acute in China, where banking sector assets have risen from 240 percent of gross domestic product at the end of 2012 to 310 percent of GDP at present.

“Authorities face a delicate balance between tightening financial sector policies and slowing economic growth,” the report said.

The report was released during the Annual Meetings of the World Bank Group and the IMF in Washington, where the latter raised its global growth forecast to 3.6 percent for this year (which would be the fastest pace since 2010) and 3.7 percent for next year amid a climate of marked optimism.

 

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