Finland Times

Financial stability risks have risen amid a moderate and uneven global economic recovery, and are harder to assess and address after they have rotated to parts of the financial system, the International Monetary Fund (IMF) warned Wednesday.

     "Divergent growth and monetary policies have increased tensions in global financial markets and caused rapid and volatile moves in exchange rates and interest rates over the past six months," Jose Vinals, director of the IMF's monetary and capital markets department, said at a press conference on the newly-released Global Financial Stability Report.

     "Risks are also rotating -- away from banks to shadow banks, from solvency to market liquidity risks, and from advanced economies to emerging markets," Vinals said, adding that five key challenges must be tackled properly to safeguard global financial stability.

     The first challenge is to enhance the traction of monetary policies in advanced economies, while managing the undesirable side effects of low interest rates. "Central bank actions must be complemented with other policies; otherwise monetary policies cannot be fully effective in achieving their aims," said Vinals. " What is needed is 'QE plus other policies'."

     The European Central Bank and the Bank of Japan have launched bold quantitative easing programs to counter disinflation pressures and stimulate economic growth, but these measures are less likely to succeed and could pose challenges to financial markets unless they are backed by structural reforms and efforts to address nonperforming loans, the IMF said in the report.

     The IMF warned the Federal Reserve, the U.S. central bank, of its first interest rate hike's impact, predicting the rate rise since the financial crisis could trigger financial market turmoil and push up bond yields sharply.

     "A sudden rise of 100 basis points in the 10-year Treasury yield is quite conceivable" as the Fed's rate hikes appear more imminent, the IMF said. "Shift of this magnitude can generate negative shocks globally, especially in emerging market economies. "

     The Fed has kept its benchmark short-term interest rate near zero since December 2008.  Many economists expect the U.S. central bank to start raising interest rates in September as long as the American economy and labor market continues to improve.

     Other challenges include preserving stability in emerging markets, coping with geopolitical risks, managing the illusion of market liquidity, and limiting the financial excesses resulting from extraordinary loose monetary policies.

     "Additional policy measures -- beyond monetary policies -- are vital to make a durable exit from the global financial crisis and to safeguard financial stability," Vinals said. "The traction of monetary policies must be increased with complementary reforms and

financial excesses need to be contained."