Bigger-than-expected rises in long-term interest rates or a sharp fall in the dollar pose risks to a financial system that is at its most resilient in a long time, the International Monetary Fund (IMF) said today.
In its global financial stability report, the IMF urged central banks to continue gradually raising interest rates toward a neutral level as a policy measure to help mitigate potential risks from excess liquidity.
IMF report
"The key risk is that long-term market rates and credit spreads may rise beyond current expectations", said Gerd Haeusler, director of international capital markets at the IMF, calling the state of financial stability "as good as it gets".
"While financial markets have largely priced in a moderate and gradual monetary tightening they might be less prepared if market rates - especially long-term rates - were to go up more abruptly," the IMF report said.
The US Federal Reserve has so far lifted base rates gradually to dampen future inflation, although most analysts agree they still have a way to climb before they reach a level where they neither stimulate nor restrict the economy.
In the meantime, sustained rises in commodity and oil prices - US crude oil futures hit a record high above $58 a barrel yesterday - remain a risk to financial stability.
The IMF also reiterated that a potential disorderly correction in currency markets, particularly should Asian central banks' appetite for holding US dollars wane, was an ongoing risk. So far, currency moves to address global imbalances have been orderly but there is a risk that could change.