A Bumpy Road Ahead

April 18, 2018/IMF

Outlook for Financial Stability

Despite ongoing monetary policy normalization in some advanced economies and some signs of firming inflation, global financial conditions are still very accommodative relative to historical norms. Although supportive of near-term growth, easy financial conditions also continue to facilitate a buildup of financial fragilities, increasing risks to global financial stability and economic growth over the medium term.

Still-Easy Financial Conditions Continue to Support Economic Growth

With global economic recovery now stronger and more synchronized (as discussed in the April 2018 World Economic Outlook [WEO]), monetary policy authorities in advanced economies have started to, or are gearing up to, normalize their monetary policy stance (see “Monetary Policy Normalization in Advanced Economies”).

Over the years since the global financial crisis, accommodative monetary policy has been crucial to ensuring a sustainable global economic recovery. But with inflation well below target and buoyant market sentiment, central banks in advanced economies have faced a difficult balancing act of keeping interest rates low to support the economy and addressing financial vulnerabilities that could put growth at risk in the medium term.

The recent firming of inflation has provided policymakers with more leeway to address financial vulnerabilities, including by deploying and developing micro- and macroprudential tools.

Global financial conditions have tightened somewhat, on balance, since the October 2017 Global Financial Stability Report (GFSR), reflecting the spike in equity market volatility in early February and investors’ jitters in late March about a wider escalation of trade tensions (Figure 1.1, panel 1).

Nonetheless, even as the US Federal Reserve has continued to normalize monetary policy, global financial conditions remain broadly accommodative relative to historical norms across both advanced and emerging market economies. Figure 1.1 (panels 1 and 2) shows global and regional financial conditions indices (FCIs), as well as their key components.

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