The IMF recently urged policymakers to use other policy tools other than easing as financial vulnerabilities such as rising debt levels could threaten medium-term growth.
The lender said that global growth would have been 0.5 percentage point lower without the policy rate cuts around the world last year, which is the largest combined number of costs in both advanced and emerging markets since the global financial crisis 12 years ago.
However, further easing at this point in the economic cycle and rising financial vulnerabilities could threaten growth in the medium term, Tobias Adrian, director of the IMF’s monetary and capital markets department, and Fabio Natalucci, his deputy, wrote in a blog.
“Taking a longer-term view, ...the easing of global financial conditions so late in the economic cycle and the continued buildup of financial vulnerabilities — including the rise in asset valuations to stretched levels in some markets and countries, the rise in debt, and large capital flows to emerging markets — could threaten growth in the medium term,” the two authors wrote.
They pointed out that default rates had already risen in the US high-yield market, and in Chinese on- and offshore corporate bond markets while emerging market debt was also trading at distress levels in some cases.
They advised countries to use other policy tools such as the countercyclical capital buffer, to keep rising vulnerabilities from putting growth at risk in the medium term.