IMF WARNS ON RISKS OF EXCESSIVE EASING / THE FINANCIAL TIMES

April 17, 2013 2:05 pm

 

IMF warns on risks of excessive easing

 

By Chris Giles in Washington

 

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The IMF appears to endorse further monetary easing by central banks, such as the Bank of England

Extraordinarily loose monetary policy risks sparking new and dangerous credit bubbles which threaten to tip the world back into financial crisis, the International Monetary Fund warned on Wednesday.
 
In its global financial stability report, the fund cautioned that further policy reforms were needed urgently to restore long-term health to the financial system before the long-term dangers of monetary stimulus materialised.
 
Without continued progress, the IMF said “the global financial crisis could morph into a more chronic phase, marked by a deterioration of financial conditions and recurring bouts of financial instability”.
 
In the short term the fund is upbeat about financial stability prospects, saying that almost all risks have improved since its last report in October. “Global financial and market conditions have improved appreciably in the past six months,” the report said, pointing out that the rise in prices of risk assets would support the global economic recovery.
 
The IMF believes unorthodox monetary policies are better than alternatives in the short term and supports Japan’s recent monetary revolution, but is concerned about the side effects of the policy.
 
The fund said that actions, particularly in Europe to underpin political support for the euro and provide credible backstops to remove the risk of an imminent collapse of the single currency had been particularly helpful. Avoiding the US fiscal cliff has also brightened the mood in financial markets alongside continued monetary easing from the Federal Reserve.
 
But the fund noted that these improvements in financial risks had not yet been translated into a more rapid and durable economic growth, so the dangers of a reversal remained high. “As global economic conditions remain subdued, the improvement in financial conditions can only be sustained through further policy actions that address underlying stability risks and promote continued economic recovery,” the financial stability report said.
 
In the eurozone, the fund said that there was a sustained need to improve the health of banks in both the troubled periphery and the core.
 
But in the periphery, the need to restore banks to health was acute as many banks, it noted, still faced difficulties in funding themselves at reasonable rates and passing on low interest rates to companies and households. “Many banks in the euro area periphery remain challenged by elevated funding costs, deteriorating asset quality, and weak profits,” the IMF said.
 
The fund repeated its advice that the eurozone needs to introduce a single resolution regime for banks at the same time as a single supervisor, ultimately to provide common backstops and common deposit guarantees.
 
In the US, the IMF thought the restructuring of banks was largely complete and the authorities now needed to begin to think about the side effects of loose monetary policy, which was leading some investors on a desperate search for yield, encouraging them to buy much more risky assets than they might believe.
 
“Of particular concern is the possible mispricing of credit risk, riskier positioning by weaker pension funds and insurance companies,” in countries where recoveries are more advanced, the IMF said.
 
For the US, the fund said: “Financial supervision should be tightened to assess the extent of such excesses, and regulation will need to play a more proactive role in this cycle at both the macro- and micro-prudential levels. Restraining a too rapid rise in leverage and encouraging prudent underwriting standards will remain key objectives.”

 

Copyright The Financial Times Limited 2013.