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IMF fears ultra-low rates are fuelling asset bubbles
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IMF fears ultra-low rates are fuelling asset bubbles

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IMF fears ultra-low rates are fuelling asset bubbles

Ultra-low interest rates around the world are fuelling financial bubbles and pushing investors into overvalued assets, the International Monetary Fund has warned in a marked shift of policy.

“Financial markets have been very optimistic in recent months. Frankly, we’re seeing some prices that are very high compared with what is happening the real economy,” said Gian Maria Milesi-Ferretti, the fund’s deputy director.

“We don’t think there is a generalised bubble but this is something we have to watch closely. In a world of very low interest rates there is an incentive to take on risk and hunt for yield, and that can lead to excesses,” he said.

Olivier Blanchard, the IMF’s chief economist, said the fund is now watching financial markets “like a hawk” but said the world economy is still too fragile to withstand the introduction of tighter monetary policy. “The first line of defence should be macro-prudential tools; slowing down the housing market for example. The recovery is not very strong and really needs to be nurtured,” he said.

The IMF cut its global growth forecast for 2014 from 3.7pc to 3.4pc in the latest update to its World Economic Outlook, warning that the advanced economies are still being weighed on by high levels of debt.

“Global growth could be weaker for longer, monetary policy should thus remain accommodative in all major advanced economies,” it said.

It has become a ritual for the IMF to keep having to cut its forecasts, a sign of the malaise in the global economy as excess manufacturing capacity lingers and a record 25pc world saving rate drains aggregate demand.

The shock contraction in the US economy during the first quarter accounts for part of the downgrade, but so does the dimming prospect for emerging economies that have picked the low-hanging fruit of catch-up growth and are struggling to find new development models. Several are now nursing their own hangovers from credit booms, while China’s housing market is deflating.

Emerging market growth was cut by 0.2 points to 4.6pc this year. This is a far cry from the glory days of the BRICS boom before the Lehman crisis, reflecting pervasive lack of reform. Latin America will grow by just 2pc, with Brazil slumping to 1.3pc and just 2pc in 2015. Russia has been slashed to 0.2pc as Western sanctions escalate and financial flows dry up.

Mr Blanchard warned that monetary tightening by the US Federal Reserve still poses a serious risk to many of these countries and could set off fresh market tremors. “I don’t think we will see major financial chaos, but there will be bumps such as those we saw in May 2013. Countries must be ready for that,” he said.

The fund said a shift in confidence could lead to “sudden and substantial changes in capital flows”, and warned that “new risks” had emerged in the Middle East. Officials say that roughly $470bn (£276bn) has leaked into emerging markets as a direct result of the Fed’s quantitative easing that would not have been invested otherwise. Much of this is “hot money” engaged in various forms of the carry trade. The danger is a sudden rush for the exits. This could occur sooner than widely assumed as the US jobless rate plummets to levels that start to ignite wage pressures.

Mr Blanchard disputed claims by the Bank for International Settlements that the global financial system itself is in increasing danger because of excess monetary stimulus and quantitative easing by Western central banks, insisting that leverage has been falling in banks and the shadow-banking nexus.

The IMF’s warnings nevertheless narrow the chasm in thinking that has emerged between the world’s two leading watchdogs. The fund largely failed to see the Lehman crisis coming in 2008, or at least gave muted warnings. The BIS was famously vindicated.

The two institutions have been going through a replay of their policy clash as the current global cycle starts to age and the usual signs of speculative excess appear. The IMF may now be taking the first precautionary steps to cover itself in case there is a fresh upset, though it clearly still thinks the greater risk is a low-growth trap, with deflationary dangers in Europe.

The fund cut its forecast for Italy to 0.3pc and for France to 0.7pc, but raised the outlook for Germany to 1.9pc. The widening gap shows once again that the European Central Bank has a near impossible task trying to set a one-size-for-all policy for two key regions pulling in opposite directions.

IMF fears ultra-low rates are fuelling asset bubbles - Telegraph

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