IMF says so far, so good with easing by central banks


Global central banks, including the Bank of Japan, buying assets and keeping interest rates low to boost growth have had “positive short-term effects for banks” even as risks from the policies are increasing, the International Monetary Fund said.

“The prolonged period of low interest rates and central bank asset purchases has improved some indicators of bank soundness,” the IMF said Thursday in its Global Financial Stability Report. “Central bank intervention mitigated dysfunction in targeted markets, and large-scale purchases of government bonds have in general not harmed market liquidity.”

Central banks in the U.S., Europe, Japan and the U.K. attacked the longest and deepest recession since the 1930s with unorthodox accommodation.

The Federal Reserve is aiding the world’s largest economy by expanding its balance sheet to a record $3.22 trillion, almost equal to Germany’s gross domestic product.

The BOJ plans to buy ¥7.5 trillion ($75.1 billion) in bonds a month and double the monetary base in two years to stave off deflation.

“The bottom line is: so far, so good,” Laura Kodres, assistant director of the fund’s Monetary and Capital Markets Department, said at a news conference at the IMF headquarters in Washington. “The low interest rates and the purchase of various types of securities by these four central banks have put a floor under the economy, boosting activity, and have helped stabilize the financial system.”

Still, if banks don’t capitalize on the help they are getting from the unconventional monetary policies to rebuild their balance sheets, “at some point we can expect another round of financial distress,” Kodres said.

While most measures of short-term balance-sheet health at U.S. lenders have improved because of the central bank policies, they face “significant interest-rate risk” because they “loaded up on government debt lately” to help meet capital requirements, Kodres said at the briefing.

“With interest rates so low, a rise could mean losses on some of these holdings,” Kodres said. “We find that the announcement of various monetary easings tended to raise the spread of bank bonds over government bonds — possibly indicating that markets saw some future credit risks for banks.”

Even as central bank policies eased dysfunction in global markets, the unprecedented actions “are associated with financial risks that are likely to increase the longer the policies are maintained,” the IMF said in the study, a chapter of its twice-yearly report that was published Thursday.

“Even though monetary policies should remain very accommodative until the recovery is well established, policymakers need to exercise vigilant supervision to assess the existence of potential and emerging financial stability threats,” wrote IMF researchers led by S. Erik Oppers, deputy division chief of the Global Financial Stability Division in the Monetary and Capital Markets Department.

The researchers found “few immediate financial stability concerns” in the monetary policies, which have “increased some measures of bank soundness” while not impairing the functioning of markets. Potential complications include greater credit risk for banks, slower rebuilding of balance sheets and “challenges in exiting from markets in which central banks have intervened,” they wrote.

U.K. lenders using the Funding for Lending program created by the Bank of England and the Treasury in August pay as little as 0.75 percent, including fees, for funds, fueling concern that efforts to spur the economy are helping borrowers at the expense of retirees and other savers.

Monetary stimulus deployed by advanced countries to spur growth is unlikely to stoke inflation as long as central banks remain free of outside influence to react to challenges, IMF economists wrote in a chapter of the fund’s World Economic Outlook released April 9.