by Pete Schroeder

WASHINGTON (Reuters) – Short-term financial risks are limited but monetary easing could fuel bubbles in asset valuations, while markets may underestimate the risks posed by upcoming elections and armed conflicts, a the International Monetary Fund (IMF) said on Tuesday.

In its biannual report on global financial stability, the IMF warns of a “growing disconnect” between increasingly strong geopolitical uncertainties and low volatility on the markets.

This disconnect increases the risk of a financial shock comparable to that observed in August, when the Bank of Japan raised its rates, explains the IMF.

The slowdown in profit growth and the weakening of the commercial real estate sector appear not to erode optimism in the equity and credit markets, notes the Washington-based institution.

The global monetary easing cycle could lead to “accommodative” financial conditions, but less restrictive rates could support already high valuations and encourage indebtedness of private and sovereign actors, while increasing the leverage of non-financial groups. banking, worries the IMF.

“These vulnerabilities could amplify shocks that have become more likely due to high geopolitical and economic uncertainty, while armed conflicts continue and uncertainty remains over the measures that the next governments to be elected will take,” writes the IMF.

In addition to the wars in Ukraine and the Middle East, half of the world’s population has or will elect a new government this year, says the IMF. The US presidential election will take place on November 5.

The institution notes that the measures promised by candidates or newly elected governments often lack clarity but involve important economic consequences.

Economists and some Wall Street observers are particularly concerned about tariff increases promised by Republican candidate for the White House Donald Trump and argue that they could revive inflation. The tax cuts promised by the former president could also widen the deficit.

The IMF urges central banks to communicate clearly and lower rates gradually and adds that regulators should closely monitor corporate debt volumes, as well as the commercial real estate sector.

The institution adds that regulators must ensure that banks are well supervised and that the information requirements required of non-bank financial players should be strengthened. The report specifies that regulators generally have a less precise vision of the activities of these actors and their levels of leverage, even though the role of these groups within the financial markets is important.

The report also mentions the use of artificial intelligence (AI), with the IMF estimating that more general use of this technology by the financial sector will improve the efficiency and speed of operations, at the cost of higher volatility.

Dependence on a few AI groups also poses operational risks and could complicate the task of regulators wishing to regulate a technology considered opaque, the report adds.

(Written by Pete Schroeder, Corentin Chappron for the , edited by Blandine Hénault)

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