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IMF warning to central banks over global financial stability

Published 13/04/2016

The IMF said the risk of a further equity rout could knock global growth by as much as 4%
The IMF said the risk of a further equity rout could knock global growth by as much as 4%

Central banks worldwide need to take further action to tackle threats to financial stability which could " tip the global economy into economic and financial stagnation" , the International Monetary Fund (IMF) has warned.

In its latest Global Financial Stability report, the IMF said that, while stock markets have steadied after recent turmoil, the risk of a further equity rout could knock global growth by as much as 4%.

The Washington-based fund said a repeat of the market woes which sent equities tumbling worldwide last August and again at the beginning of the year could "create a pernicious feedback loop of fragile confidence, weaker growth, tighter financial conditions, and rising debt burdens".

It estimated this gloomy scenario could leave global growth 3.9% below the baseline over the next five years - equivalent to forgoing one year of global growth.

But it believes proactive moves by central banks to head off these risks could see world output as much as 1.7% above the baseline by 2018.

Jose Vinals, financial counsellor and head of the IMF's monetary and capital markets department, said: "A key question that this report addresses is whether the turmoil over the past months is now safely behind us, or is it a warning signal that more needs to be done?

"I believe it is the latter: more needs to be done to secure global stability."

It wants regulators to continue tackling issues within the banking sector left over from the financial crisis, while it said emerging market economies also needed to bolster their resilience to global headwinds.

It pointed to China as the emerging economy most in need of action to stabilise and balance growth.

China's slowdown in growth was behind the recent stock market turbulence, sparking a lengthy commodities rout amid fears over a slump in demand from the world's second biggest economy.

The IMF warned that bank loans to companies potentially at risk in China could cause bank losses of around 7% of gross domestic product.

It said the magnitude of these vulnerabilities calls for an "ambitious policy agenda".

But it said stock markets had been helped by intensified policy actions by the European Central Bank and a more cautious stance toward raising rates by the US Federal Reserve.

London's FTSE 100 Index surged 1.5% to a new 2016 high on Wednesday as commodities contin ued to rally higher after Chinese exports rose 11%, brightening the outlook for global trade.

In its Fiscal Monitor report published separately, the IMF warned that the public finances of many economies had "worsened significantly" over the past year as it revised up the debt- to-growth ratios for a raft of countries, including the UK.

It cautioned that the "outlook remains very uncertain and the likelihood of a protracted lower-growth scenario has increased" and said policymakers must take "bold and swift" action if global output falls significantly.

The IMF added that the UK referendum on membership of the European Union could have "large consequences for the future of Europe".

This comes after it downgraded UK growth on Tuesday over fears of disruption if Britain votes to leave the EU on June 23.

In its World Economic Outlook, the global financial body warned that Brexit could inflict "severe regional and global damage" by disrupting trade relations.

It scaled back its projection of UK economic growth for 2016 by 0.3 percentage points to 1.9% - marginally below the 2% forecast of the Government's Office for Budget Responsibility - but held its forecast for 2017 at 2.2%.

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