IMF: "Major Global Economies Enter Interest Rate Cut Cycle... Should Reduce Rates Gradually"

The International Monetary Fund (IMF) emphasized the need for gradual interest rate cuts on the 22nd (local time), warning that the easing trend in monetary policies of major countries around the world could fuel asset price bubbles.

In its semi-annual Global Financial Stability Report released that day, the IMF stated, "Short-term global financial risks are under control," but also pointed out that "as central banks of major countries enter a monetary easing cycle, asset prices may be excessively inflated, and global private and government debt, as well as corporate leverage, could increase."

Furthermore, the IMF explained that such vulnerabilities could amplify shocks due to military conflicts and uncertain future policies of governments to be formed after elections. The IMF also noted that credit and equity markets have not been significantly affected by the slowdown in corporate earnings growth or the crisis in the commercial real estate sector.

The IMF warned that this divergence increases the likelihood of market shocks similar to the sharp declines in major stock markets triggered by the unwinding of yen carry trades following Japan’s interest rate hike in August.

The IMF recommended that central banks gradually lower interest rates and emphasized that regulators should closely monitor corporate debt and commercial real estate while strengthening bank supervision. It also advised enhancing reporting requirements for non-bank financial institutions such as hedge funds and private equity funds.

The IMF also mentioned the expanding role of artificial intelligence (AI) in its report. The IMF noted that increased AI adoption by financial firms can improve speed and efficiency but may also increase volatility. Additionally, reliance on a small number of AI service providers could make it difficult for regulators to oversee AI, thereby increasing risks.

Meanwhile, this IMF financial stability report was released amid the IMF-World Bank Group (WBG) Annual Meetings. The significance of this annual meeting lies in the deepening geopolitical uncertainties due to the Middle East and Ukraine wars, as well as being about 10 days away from the U.S. presidential election results.

In particular, the victory of former President Donald Trump, the Republican candidate in the U.S. presidential election, is the biggest issue attracting enormous attention from world governments and financial leaders. Trump’s plan to raise universal tariffs could reignite global inflation, and his tax cut promises could worsen the U.S. fiscal deficit.