Bloomberg News

IMF Says ‘So Far, So Good’ in Easing by Central Banks

April 11, 2013

Global central banks 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 today 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 Bank of Japan plans to buy 7.5 trillion yen ($75.1 billion) of 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 today at a press 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.”

‘Financial Distress’

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 told reporters.

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 today.

‘Vigilant Supervision’

“Even though monetary policies should remain very accommodative until the recovery is well established, policy makers 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 for 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.

Outside Influence

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.

The four largest developed-market monetary authorities have driven borrowing costs to record lows. Bank of Japan Governor Haruhiko Kuroda, who took office in March, last week embarked on record easing, aligning with the Fed, the European Central Bank and the BOE in their commitment to return their economies to full strength.

Fed Chairman Ben S. Bernanke said April 8 that expansionary monetary policies in the world’s largest countries are “mutually constructive.” Monetary stimulus from global central banks gives “additional support for other countries through stronger financial markets, more exports,” Bernanke said at a conference in Stone Mountain, Georgia.

IMF Managing Director Christine Lagarde said in a speech yesterday that the global economy probably won’t gain much traction this year as Europe and Japan fail to recover and lag behind other developed economies.

The 17-country euro region still has much to do, including cleaning up a banking system that isn’t lending enough to the real economy, Lagarde said. Japan must rely more on monetary policy to boost its growth, she said, while welcoming last week’s move by the Bank of Japan (8301) to embark on record easing.

To contact the reporter on this story: Jeff Kearns in Washington at

To contact the editor responsible for this story: Chris Wellisz at

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