IMF warns financial risks linger amid 'soft landing'

IMF global outlook: Sending out a word of caution, the International Monetary Fund (IMF) has said that there is overexuberance in markets as investors look for central bankers to pull off a "soft landing" in their years-long inflation battle.

The IMF in its latest semi-annual Global Financial Stability Report has stated that markets have turned "quite optimistic" since the October edition, when investors were still recovering from spring turmoil in the banking sector.

The IMF added that now downside risks are receding but it has cautioned against complacency, noting that stretched valuations across a range of asset classes, geopolitical tensions, and rising debt levels could all pose problems if central bankers have to keep rates higher for longer to contain stubborn inflation.

"Confidence in a soft landing for the global economy is growing," the IMF said in its report. "However, global inflation remaining persistently above those targets could challenge this narrative and may trigger instability," said the IMF. 

Specifically, the IMF said central bankers and other policymakers need to move cautiously as inflation eases, and push back against "overly optimistic expectations of the pace of disinflation and monetary policy easing."

The report comes days after stronger than expected inflation numbers trimmed hopes the Federal Reserve could start cutting rates soon.

"The primary risk there is the extent to which central banks, particularly in the U.S. ... may in fact not end up delivering the cuts," said Fabio Natalucci, deputy director of the IMF’s Monetary and Capital Markets Department.

 'TRIPLE WHAMMY'

While risks loom, the IMF did find that the overall banking sector has stabilized somewhat since the 2023 turmoil. It still cautioned that there is a "tail of weak banks" globally that merit a close watch.

All told, banks holding about 19% of global banking assets have breached at least three of five key risk metrics the IMF tracks as a gauge of bank health, with most of those firms found in the U.S. or China.

Furthermore, the report noted there are over 100 banks, which represent about 3 per cent of the assets in the banking system, that are struggling under a "triple-whammy" of strains. Those firms have high concentration in commercial real estate, large unrealized losses relative to their capital reserves, and over 25 per cent of their deposits are uninsured.