A sharp tightening would test the resilience of the global financial system a decade after the failure of Lehman Brothers, said the International Monetary Fund, noting that regulatory frameworks have been enhanced and the banking system has become stronger.
“We are determined to understand the full details of what has happened and will communicate these to investors and stakeholders as soon as possible”, said chairman Luke Johnson. Global economic expansion remains strong, but the trade war could potentially shock investor confidence, with “significant adverse consequences” for global macroeconomic activity, Tobias Adrian, IMF monetary and capital markets department director, told reporters.
“In the United States, momentum is still strong as fiscal stimulus continues to increase, but the forecast for 2019 has been revised down due to recently announced trade measures, including the tariffs imposed on $200 billion of USA imports from China”, IMF report said.
This forecast is a normalization from the current inflation numbers-which the Philippine Statistics Authority (PSA) recently reported was at 6.7 percent in September alone.
President Donald Trump has already pushed through laws repealing banking rules in America for smaller institutions, saying they were holding back bank lending to businesses.
The IMF also warns market investors, who have seen the largest upward bull run in stocks in history.
One could be the ending of “easy money”.
“It’s inevitable that central banks make the decisions that they make”.
The IMF fears this could lead to sharp falls in markets.
Over the last few months, the Chinese government has urged banks to lend more and called on local governments to speed up bond issuance to raise funds for infrastructure spending.
Southeast Asian leaders pose for family photo during ASEAN Leaders Gathering on the sidelines of International Monetary Fund and World Bank Annual Meeting 2018 in Nusa Dua, Bali, Indonesia, October 11, 2018.
Finance ministers for developing nations in the Group of 24 whose economies have been battered by stormy markets urged major economies to reform the global trading system, rather than discard it.
The IMF said the balance of risks was now tilted to the downside, with a higher likelihood that financial conditions will tighten further as interest rates normalize, hurting emerging markets further at a time when USA -led demand growth will start to slow as some tax cuts expire.
While defending justified rate hikes, Lagarde added on Thursday that uncoordinated rate increases in advanced economies were contributing to destabilising capital outflows from emerging markets.
The IMF also risks associated with high corporate debt, rising nonperforming loans and too much public debt overall.
Despite the Federal Reserve’s interest rate increases, financial conditions “have eased further” in the U.S.as equity valuations have stayed lofty. South Africa, only 0.8 per cent this year; Angola, contracting by 0.1 per cent this year.
That would be “of a magnitude” similar to the financial crisis.