Global financial stability risks remain elevated, IMF says

The International Monetary Fund warned in its Financial Stability Report on Wednesday that medium-term financial stability risks remained "elevated", with the vulnerabilities which had built-up over recent years possibly paving the way for a "bumpy" road ahead - which could put growth at risk.

While the recent firming of inflationary pressures was welcome, easing the burden on central banks to maintain interest rates "extremely" low, there was also now the risk that it might accelerate more quickly than expected.

That could see a sharp tightening of financial conditions as central banks are forced to close the liquidity taps faster than was then currently expected.

It would also come at a time of vulnerability, what with valuations for risky assets still "stretched".

Indeed, according to the Fund "some late-stage credit cycle dynamics [are] emerging, reminiscent of the pre-crisis period. This makes markets exposed to a sharp tightening in financial conditions, which could lead to a sudden unwinding of risk premiums and a repricing of risky assets."

So policymakers needed to more actively use their micro and macroprudential tools to address those weaknesses.

The IMF, whose main remit is guard against and help resolve so-called international balance of payments crisis, also stressed the need to complete the global regulatory reform agenda, pointing to the work that remained to be done at some banks in both developed and emerging markets.

"In advanced economies some weaker banks still need to strengthen their balance sheets, and some institutions operating internationally run dollar liquidity mismatches. A sudden spell of turbulence in financial markets could expose these mismatches and crystallize dollar funding strains," the IMF said.

Emerging markets, specifically, needed to be mindful of the risks associated with rising interest rates in the States.

Meanwhile, in China, the vulnerabilities linked to the inter-connectedness between the traditional and so-called 'shadow banking' sectors "remain high", the Fund's economists said.

The multilateral lender also flagged the risk that house prices around the world might fall simultaneously as financial conditions tightened.

"[The heightened synchronicity of house prices can signal a higher probability of adverse scenarios for the real economy, especially when credit is high or rapidly expanding.