Quantitative easing and low interest rates have damaging side effects, warns IMF

Central banks around the world were last night warned that emergency action taken to prop up fragile economies could have damaging side effects.
The International Monetary Fund said ultra-low interest rates and ‘unconventional’ measures such as quantitative easing have ‘contributed to financial stability in the short term’.
But the Washington-based watchdog warned that risks ‘are likely to increase the longer the policies are maintained’.

Advice: The IMF (whose managing director, Christine Lagarde, is pictured) has asked central banks like the BoE to consider the impact of their policies

Central banks have slashed interest rates to record lows and pumped huge sums of cash into economies since 2008 to stop recession turning into depression.
Interest rates in Britain have stayed at 0.5 per cent since March 2009 and £375billion of newly-created money has been injected into the economy. ‘The prolonged period of low interest rates and central bank asset purchases has improved some indicators of bank soundness,’ said the IMF in its latest global financial stability report.
‘Policymakers should be alert to the possibility, however, that financial stability risks may be shifting to other parts of the financial system, such as shadow banks, pension funds and insurance companies.

 

‘The central bank policy actions also carry the risk that their efforts will spill over to the other economies.’
The report added: ‘Despite their positive short-term effects for banks, these central bank policies are associated with financial risks that are likely to increase the longer the policies are maintained.’
The Fund said the emergency aid has allowed banks to delay repairing their balance sheets. It also warned that ‘policy missteps’ – as policies such as quantitative easing are unwound – could wreak havoc in financial markets. But it said there should be no change of tack ‘until the recovery is well established’.