The International Monetary Fund (IMF) has warned that the world economy -- which is growing at a rate of 3.1 percent, compared to 3.4 percent last year -- could crash if central banks do not continue to keep interest rates low. The IMF said uncertainty and financial market volatility have increased and medium-term growth prospects have weakened.
"In many advanced economies, the main risk remains a decline of already low growth, particularly if global demand falters further and supply constraints are not removed," IMF managing director Christine Lagarde said. This should be supported by "continued monetary policies and improved financial stability", she said.
She warned that when the U.S. and U.K. central banks increase interest rates, the effect on volatile financial markets will pose a challenge to stabilizing global economies. Lagarde also urged Japan and the euro zone to maintain their quantitative easing programs to stimulate their economies.
After the IMF's warning, the G30 group of experts, which includes former central bank governors, said in a report that keeping interest rates low for a long period would lead to a financial crisis. They added it would also lead to rising debt, and encourage excessive risk-taking.
"The supportive actions by central banks can be useful, but there are serious risks involved if governments, parliaments, public authorities, and the private sector assume central bank policies can substitute for the structural and other policies they should take themselves. The principal risk is that excessive reliance on ever more central bank action could aggravate the underlying systemic problems and delay or prevent the necessary structural adjustments," the report said.
The report was written by Axel A Weber, Jean-Claude Trichet, Jacob A Frenkel and Arminio Fraga. Weber, Trichet and Frenkel are former governors of the Bank of Israel while Fraga is a former governor of the Bank of Brazil.