Rising levels of debt prompted by five years of ultra-low interest rates could exacerbate the dangers of bringing monetary policy back to normal, the International Monetary Fund warned yesterday.

In its twice-yearly Global Financial Stability Report , the fund noted "the scaling back of certain extraordinary policy supports has not been accompanied by adequate preparations for a new environment of normalised, self-sustaining growth".

Although the IMF has warned about the potential dangers of the exit from US quantitative easing (QE) for at least a year, its new concern is that prolonged low interest rates will make any exit even more difficult.

Policy actions
"The key message is that strong policy actions are needed to definitely turn the corner from the great financial crisis and engineer a successful shift from 'liquidity-driven' to 'growth- driven' markets," said José Viñals, IMF monetary and capital markets department director.

Saying the timing of an exit was “critical”, the IMF warned there might be no easy way to normalise policy without significant financial turmoil.

"Undue delay could lead to a further build-up of financial stability risks, and too rapid an exit could jeopardise the economic recovery and exacerbate still-elevated debt burdens in some segments of the economy."

Improvement
The IMF's concern came amid an improvement in overall financial stability in advanced economies alongside a small increase in the vulnerability of emerging economies.

Rising government and corporate debt in many economies were high on its list of concerns. The consequences of interest rates rising, the report warned, could potentially be systemic.

Mr Viñals highlighted the vulnerability of corporations in emerging markets. “Rising interest rates, weakening earnings and depreciating exchange rates could put substantial pressure on emerging market corporate balance sheets under our adverse scenario,” he said. – (Copyright The Financial Times Limited 2014)