The IMF’s latest Global Financial Stability Report highlights limited short-term financial risks but warns that monetary easing could create asset bubbles. It emphasizes a disconnect between rising geopolitical uncertainties and stable market volatility, potentially heightening the risk of financial shocks. The report urges central banks to communicate clearly and manage corporate debt while noting concerns over AI’s impact on financial operations and regulatory challenges. With global elections ongoing, the IMF underscores the need for careful monitoring of economic policies and conditions.
By Pete Schroeder
WASHINGTON (Reuters) – The International Monetary Fund (IMF) has reported that while short-term financial risks are currently manageable, the potential for monetary easing to inflate asset bubbles remains a significant concern. The report warns that markets might be underestimating the impact of looming elections and ongoing armed conflicts.
In the latest Global Financial Stability Report, the IMF highlights a concerning ‘growing disconnect’ between escalating geopolitical uncertainties and the prevailing low volatility in markets.
This disconnection heightens the likelihood of a financial shock, reminiscent of the turbulence experienced in August when the Bank of Japan adjusted its interest rates.
The IMF also points out that decreasing earnings growth and a softening commercial real estate sector have not tempered the optimism seen in equity and credit markets.
The global trend of monetary easing could create ‘accommodative’ financial conditions, but this reduction in interest rates may further inflate high valuations and increase leveraged positions among both private and sovereign entities, raising concerns about non-bank financial institutions as well, the IMF warns.
‘These vulnerabilities could amplify shocks that are becoming increasingly probable due to heightened geopolitical and economic uncertainties,’ the IMF states, referencing ongoing armed conflicts and the ambiguity surrounding actions from upcoming governments.
Notably, half of the world’s population is expected to elect new leadership this year, with the U.S. presidential election scheduled for November 5.
The IMF notes that economic policies proposed by newly elected officials often lack specificity but carry significant economic implications.
Economists and some market analysts are particularly worried about tariff increases suggested by Republican presidential candidate Donald Trump, arguing these could reignite inflation. Additionally, potential tax cuts promised by the former president could exacerbate the national deficit.
The IMF recommends that central banks enhance their communication strategies and implement gradual interest rate reductions. It also emphasizes the necessity for regulators to closely monitor corporate debt levels and the commercial real estate market.
Furthermore, it asserts that regulatory bodies must ensure robust supervision of banks while strengthening information requirements for non-bank financial players. The report indicates that regulators often lack a clear understanding of these actors’ activities and leverage, despite their significant role in financial markets.
The discussion includes the impact of artificial intelligence (AI) on the financial sector, with the IMF suggesting that broader AI adoption could enhance operational efficiency and speeds but may simultaneously introduce increased volatility.
Dependence on a limited number of AI providers might create operational risks and complicate regulatory oversight, given the opaque nature of this technology, the report concludes.
(Written by Pete Schroeder, Corentin Chappron for the French edition, edited by Blandine Hénault)
Copyright © 2024 Thomson Reuters