IMF warns of potential financial risks of loose monetary policy

The International Monetary Fund (IMF) on Thursday warned central banks to be alert to the potential financial risks of super-loose monetary policy adopted to cope with the financial crisis.


"So far, so good, but if the time that central banks have provided through their unconventional policies is not used productively by financial institutions and their regulators, at some point we can expect another round of financial distress," said Laura Kodres, Assistant Director of the IMF's Monetary and Capital Markets Department. 


Major central banks have taken exceptionally loose monetary policy, consisting of ultra-low interest rates and large-scale bond buying, to boost the economy since 2008. The U.S. Federal Reserve has kept the short-term interest rate near zero for over four years and is currently buying 85 billion dollars of treasury securities and mortgage-backed securities each month.


Last week, the Bank of Japan unveiled a series of more aggressive easing measures over two years to end nearly two decades of deflation in Japan.


In a section of its latest Global Financial Stability Report ( GFSR), the IMF warned that the longer super-loose monetary policy is maintained, a number of potential financial risks are likely to increase, "including heightened credit risk for banks, delays in balance sheet repair, difficulties in restarting private interbank funding markets, and challenges in existing from markets in which central banks have intervened."


The potential spillover effects of super-loose monetary policy in advanced economies could also affect financial stability in emerging market economies, the report noted.


The IMF said that policymakers need to be vigilant and assess the emergence of potential and emerging financial stability threats. "They also should use targeted policies designed to foster bank balance-sheet repair and reduce their vulnerability to market disruptions," said the international lender.


The GFSR was released prior to the spring meetings of the IMF and its sister agency World Bank, scheduled to kick off on April 19 in Washington D.C., which would draw central bankers, finance ministers and other experts to discuss key global economic issues and policy actions.