9 Oct 2013
IMF urges central banks to withdraw stimulus carefully
FXstreet.com (Barcelona) - The International Monetary Fund's warned in its latest Global Financial Stability Report that an unskilful withdrawal of monetary stimulus by central banks could cost investors trillions of dollars.
According to the report, a panic created by the reduction of asset purchases by central banks could lead to a 1% rise of interest rates on sovereign debt, resulting in losses of approximately 2.3 trillion dollars.
“Achieving a smooth transition requires policies that carefully manage portfolio adjustments while addressing
structural liquidity weaknesses and systemic vulnerabilities,” the IMF stressed in the report, pointing to a set of actions policymakers could undertake in order to prevent excessive market volatility: “These include clarity of communication about the parameters for the withdrawal of monetary stimulus, and regulatory scrutiny of the liquidity offered to investors in funds exposed to illiquid assets, especially when repo-funded, to mitigate spikes in asset correlations and volatility.”
The IMF also urged the Eurozone to speed up the process of creating the banking union in order to restore investors' confidence in the area's financial sector. “Otherwise, the euro area risks entering a lengthy, chronic phase of low growth and balance sheet strains,” the Fund said.
Furthermore, the report points to the need of curbing credit growth in China in order to minimize risks to financial stability and urges Japan to complete its fiscal and structural policy adjustments “to contain a potential sharp rise in government bond risk premiums if sovereign debt dynamics do not improve.”
According to the report, a panic created by the reduction of asset purchases by central banks could lead to a 1% rise of interest rates on sovereign debt, resulting in losses of approximately 2.3 trillion dollars.
“Achieving a smooth transition requires policies that carefully manage portfolio adjustments while addressing
structural liquidity weaknesses and systemic vulnerabilities,” the IMF stressed in the report, pointing to a set of actions policymakers could undertake in order to prevent excessive market volatility: “These include clarity of communication about the parameters for the withdrawal of monetary stimulus, and regulatory scrutiny of the liquidity offered to investors in funds exposed to illiquid assets, especially when repo-funded, to mitigate spikes in asset correlations and volatility.”
The IMF also urged the Eurozone to speed up the process of creating the banking union in order to restore investors' confidence in the area's financial sector. “Otherwise, the euro area risks entering a lengthy, chronic phase of low growth and balance sheet strains,” the Fund said.
Furthermore, the report points to the need of curbing credit growth in China in order to minimize risks to financial stability and urges Japan to complete its fiscal and structural policy adjustments “to contain a potential sharp rise in government bond risk premiums if sovereign debt dynamics do not improve.”