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LONDON, April 6 (Reuters): Bigger than expected rises in long-term interest rates, or a sharp fall in the dollar, pose risks to a financial system that is at its most resilient in a long time, the International Monetary Fund said yesterday.
In its global financial stability report, the IMF urged central banks to continue gradually raising interest rates toward a neutral level as a policy measure to help mitigate potential risks from excess liquidity.
The US Federal Reserve has so far lifted base rates gradually to tamp down future inflation, although most analysts agree they still have a way to climb before they reach a level where they neither stimulate nor restrict the economy. In the meantime, sustained rises in commodity and oil prices
US crude oil futures hit a record high above $58 a barrel Monday-remain a risk to financial stability.
But IMF deputy director for international capital markets Hung Tran said that the impact from high oil prices has been "quite limited".
The IMF also reiterated that a potential disorderly correction in currency markets, particularly should Asian central banks' appetite for holding US dollars wane, was an ongoing risk.
So far, currency moves to address global imbalances have been orderly but there is a risk that could change.
Haeusler reiterated the IMF view that Asian central banks would do well to move toward letting fixed currencies float.
The IMF also singled out as a risk the proliferation of various complex financial instruments like credit derivatives and collateralised debt obligations which are in wide use but have not yet been tested in a financial stress situation.
While these instruments are traded in secondary markets, they are priced, bought and sold according to models that are likely commonly shared among a wide array of investors.
Higher associated debt levels have increased households' exposure to house price moves, particularly among first-time buyers.
Emerging markets so far have benefited from improved financing conditions over the past two years, which have stemmed in part from increased global liquidity but also from increased reliance on domestic capital markets, the IMF said.
But it also said that many emerging markets "continue to face considerable maturity and currency mismatches on their balance sheets."
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