WASHINGTON—Global central banks’ moves to quickly raise interest rates have fueled increased risks to the financial system, the International Monetary Fund warned Tuesday, while saying stability concerns bubbling up in the United Kingdom appear contained.
The Bank of England took steps to address recent turmoil in British bond and currency markets for the second straight day on Tuesday. “At this point, we don’t anticipate these actions being necessary in other countries,” Tobias Adrian, head of the IMF’s Monetary and Capital Markets Department, said at a press conference Tuesday.
The comments came together with the release of the fund’s latest Global Financial Stability Report. It warned of heightened risks fueled by deteriorating market liquidity—or the ability to easily buy or sell an asset—that could combine with elevated financial vulnerabilities fueled by years of low interest rates and cheap credit to amplify future shocks.
Mr. Adrian said the only periods when financial risks have been higher were in times of acute crisis, such as the global financial crisis of 2007-2009 and the start of the 2020 Covid-triggered downturn.
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“We are certainly at a stressed moment,” he said. Still, the fund’s baseline scenario “is one where things continue to be orderly.”
The Federal Reserve and other central banks are raising interest rates at the fastest pace in more than four decades to beat back inflation by slowing economic growth. The risk is that rate increases can cause disruptions in lending, which swelled when rates were low. Amid high inflation and significant economic uncertainty, global stock and bond markets have been highly volatile, with investors aggressively pulling back from risk taking, the IMF report said. Fund officials and global policy makers are holding meetings this week in Washington.
“There is a risk of a disorderly tightening in financial conditions,” the report said, warning that investors could continue to pull back from global markets “if inflationary pressures do not abate as quickly as currently anticipated or the economic slowdown intensifies.”
Separately Tuesday, the IMF released economic projections that showed global growth is forecast to slow next year more than previously expected. The IMF attributed the weaker outlook to the effects of inflation, war in Ukraine and the slowdown in China due to Covid-19 lockdowns.
The global economy is projected to expand 2.7% in 2023, down from 3.2% this year and 6% in 2021, the IMF said. The new 2023 forecast represents a modest reduction from a July estimate.
The IMF said the U.S. economy would expand 1% next year. The fund forecasts a 1.6% expansion of the U.S. economy this year.
Central banks must act to keep inflationary pressures from becoming entrenched, the fund said in its report. It referenced a period of the 1970s when the Fed raised rates aggressively to bring down inflation but then reversed course prematurely for fear of inflicting more pain on the labor market than the public and Congress would tolerate.
“Policy makers should heed the lessons of the past,” the fund said.
Recent turmoil in British bond and currency markets has exposed potential risks lurking in pensions and government bond markets, which were relative oases of calm in past financial flare-ups. The Bank of England extended support targeted at pension funds for the second day in a row on Tuesday, the latest attempt to contain the fallout of a furious bond-market selloff that has threatened U.K. financial stability.
““Policy makers should heed the lessons of the past””
The U.K. government on Sept. 23 announced a package of tax cuts that would have added significantly to deficits. In response, the pound sank to a record low against the dollar, and yields on British bonds, known as gilts, shot up.
“Dramatic stress in the gilts market shows how sudden price moves combined with forced selling and deleveraging dynamics can lead to disorderly conditions that could threaten broader market functioning and stability,” the IMF said in its report Tuesday.
The IMF warned emerging market economies could be most affected by any downturn, squeezed by high borrowing costs, high inflation and volatile commodity markets. Corporate borrowing costs have also jumped, the IMF said, while warning about risks in the U.S. housing market, pointing to the nonbank financial firms that play an increasingly large role in mortgage finance but are less regulated than banks.
Policy makers should contain further buildup of vulnerabilities by adjusting policy levers such as underwriting standards and supervisory pressure to control pockets of risk, Mr. Adrian said in a blog post accompanying Tuesday’s report.
“Policy makers face an unusually challenging financial stability environment,” he wrote. Risks to financial stability have substantially increased “amid the highly uncertain global environment.”
Corrections & Amplifications
Tobias Adrian is the head of the IMF’s Monetary and Capital Markets Department. An earlier version of this article incorrectly called him Adrian Tobias. (Corrected on Oct. 11)
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