The International Monetary Fund (IMF) has urged countries to “safeguard” global financial stability following its report that financial risks are on the rise.
According to the IMF’s latest Global Financial Stability Report, since October 2014 financial risks have risen and rotated to parts of the financial system that are harder to assess.
It warned that risks had increased amid a “moderate and uneven” global economic recovery, with rates of inflation “too low” in many countries.
The IMF cited divergent growth and monetary policies as having increased tensions in global financial markets, resulting in “rapid and volatile moves” in exchange rates and interest rates over the past six months.
It suggested that risks are rotating away from banks and into shadow banks, from solvency to market liquidity risks and from advanced economies to emerging markets.
José Viñals, financial counsellor and head of the IMF’s Monetary and Capital Markets Department, said: “As risks rise and rotate, additional policy measures are required to enhance monetary policy traction and ground financial stability.
“Prompt action is critical at the global level as well as in specific countries.”
The report highlighted the need to preserve stability in emerging market economies, which have benefited from lower commodity prices and lower inflationary pressures.
The IMF stated: “However, oil and commodity exporters, as well as market sectors that have borrowed heavily face more substantial risks. In addition, the sharp dollar appreciation entails additional risks for corporates and countries with large foreign currency debts.
“Regulators need to conduct bank stress tests related to foreign currency and commodity price risks, and more closely monitor corporate leverage and unhedged foreign currency exposures, including derivatives positions.”
One of the other five recommendations set out by the IMF in order to maintain financial stability related to managing the “undesirable side effects” of low interest rates in developed countries.
Turning to the US, the IMF report observed that the Federal Reserve needed to get the “pace of exit” right when it comes to raise interest rates.
The IMF added: “But potential complications could arise given divergences between the market and official views of inflation prospects. A rapid decompression of yields could also increase volatility with global repercussions.”