By Pete Schroeder
WASHINGTON (Reuters) – Policy makers around the world are entering a difficult phase of recovery from the pandemic and must be careful to provide continued economic support without promoting instability in financial markets, the International Monetary Fund warned on Tuesday.
Nearly 20 months after the start of the global pandemic, many countries, including the United States, are now considering how to withdraw the extraordinary stimulus given to the economy, a process that in itself carries risks of disrupting global markets.
In its latest Global Financial Stability Report, the IMF urged policymakers to “act decisively” and target continued economic support tailored to their countries’ needs.
Immediate action and clear communication ahead of any policy changes will be essential to ensure that economic support gets where it’s needed, without encouraging inflation or increasing volatility, warned the IMF.
“Policy makers are faced with a challenging balance: maintaining short-term support for the global economy while avoiding unintended consequences and medium-term financial stability risks,” the report said.
The IMF signaled some initial “warning signs” of instability, pointing to increased financial risk-taking and fragilities among non-banking institutions, such as life insurance funds.
In recent weeks, markets have been troubled by fears of a possible default by Chinese real estate giant Evergrande, as well as rising energy prices, which have caused some companies in the sector to collapse.
The IMF said policy makers must “urgently” address weaknesses and potential increases in market volatility.
“If left unchecked, these vulnerabilities could evolve into structural problems, putting medium-term growth at risk and testing the resilience of the global financial system,” the report said.
The rapid growth of cryptocurrencies also poses several risks for investors and policymakers, the IMF added.
Emerging markets could face “destabilizing capital flows” as cryptocurrencies are used to circumvent exchange restrictions and capital controls, he added.
On climate change, the IMF said policy makers should prioritize a stronger sustainable financing regulatory framework – including data and other disclosure requirements – to encourage the private sector to increase investments in cleaner energy sources.
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