IMF Financial Stability report

Managing the side effects and eventual withdrawal of accommodative monetary policy in the United States was the current primary challenge to stability in the global financial system, the International Monetary Fund (IMF) said on Wednesday.

As the IMF released its Global Financial Stability Report, it said that it was expecting both rising interest rates and market volatility, as the US Federal Reserve would pare back its bond purchases, possibly later this year.

As a result of the 2008 financial crisis, the United States central bank has kept interest rates at a record low and has bought bonds worth $85 billion (62.8 billion euros) a month to pump liquidity into the struggling US economy.

In June this year, the US Fed signaled it was considering scaling back the program.

In its report, the IMF said the US Fed's reorientation was important to avoid fueling potential speculative bubbles. However, the lender expressed the fear the new policy might lead to turbulences in emerging economies as capital flows began to ebb.

The IMF called on the US central bank to communicate its monetary policy measures in a clear and timely fashion.

Europe stabilizing but not safe

The IMF also reiterated its calls for the eurozone to reform the banking system in the single currency area.

"Further efforts to cleanse bank balance sheets and to move to full banking union are vital," the IMF noted in its report.

However, the IMF also praised eurozone leaders for stabilizing financial markets which had reduced funding pressures on banks and sovereigns.

Nevertheless, further policy measures were needed to restore confidence in eurozone banks and government, which, if they were not taken would increase the risk of a credit crunch in the eurozone leading to a new recession.

uhe/mz (dpa, AP)