entral banks are running the risk of a severe financial crisis through policies aimed at boosting short-term economic growth, the International Monetary Fund has warned.
In its half-yearly global financial stability report, the IMF said the removal of the threat of higher interest rates had prompted a rapid recovery in financial markets after last autumn’s turbulence but would lead to a fresh buildup in already high levels of debt.
The report expressed concern about a sharp increase in lower quality corporate bonds, the vulnerability of European banks to falling government bond prices, debt levels in China, flows of hot money in and out of developing countries, and the risk of house price crashes.
The report said the tightening in financial conditions during the final three months of 2018 – when markets were unnerved by the possibility of the US Federal Reserve tightening policy throughout 2019 – had been too short-lived to have a material impact on the buildup of vulnerabilities.
Tobias Adrian and Fabio Natalucci, two IMF officials, said in a blogpost released alongside the report that policymakers faced a dilemma as they sought to counter a slowdown in the global economy that has seen the IMF cut its growth forecast to 3.3% this year.
“In the United States, the ratio of corporate debt to GDP is at record-high levels. In several European countries, banks are overloaded with government bonds. In China, bank profitability is declining, and capital levels remain low at small and medium-size lenders,” Adrian and Natalucci said.
“By taking a patient approach to monetary policy, central banks can accommodate growing downside risks to the economy. But if financial conditions remain easy for too long, vulnerabilities will continue to build, and the odds of a sharp drop in economic growth at some later point will be higher.”