Higher interest rates among threats as finance chiefs weigh up global outlook

European Central Bank President Mario Draghi said the key threat facing the global economy is a jump in interest rates sparked by financial instability, inflation surprises or geopolitics.

“It’s quite clear that the main risk we should focus on here is a sharp repricing in assets, or a sharp increase, a sharp and sudden increase, in interest rates,” he said in Bali as finance ministers and central bankers met at the International Monetary Fund’s annual gathering yesterday.

But Bank of Japan Governor Haruhiko Kuroda said at the meeting steady interest rate increases by the Federal Reserve were “basically good” for the world economy, shrugging off concerns that higher US rates could hurt Asian economies by triggering capital outflows.

However, Mr Kuroda was more cautious about the risks posed by escalating trade tensions, which he described as of a “rather unusual” scale and a “new development” for the global economy, Reuters reported.

He also said an ageing population could create structural challenges for central banks, as these undercut their economies’ growth potential and require them to use more monetary firepower to reflate growth.

The IMF revised its global economic-growth outlook lower for the first time in more than two years as trade threats take their toll. At the same time concerns are mounting over the world’s ability to cope with a gradual central-bank retreat from crisis-era support, according to Bloomberg. International markets tumbled last week.

Referring to his conversations with delegates at the IMF meeting, Mr Draghi said banks are “by and large” much stronger than in the past. However, he

added that shadow banking needs closer monitoring, and that macro-prudential tools must be enhanced to safeguard financial stability.

The risk of faster-than-expected inflation was “one of the issues that was looked at, especially in the US”, he said, adding that the chance of a spike remains low in Europe.

Trade protectionism was regarded as the biggest geopolitical risk and the “degree of concern” has worsened in the past six months. Mr Draghi said the recent signing of a free trade agreement between the US, Mexico and Canada was “positive” but it remains to be seen if the US-China dispute will escalate.

The ECB chief also cited attacks on central-bank independence as a geopolitical risk. Those comments come in the wake of a series of criticisms of the US Federal Reserve by President Donald Trump, and Turkish President Recep Tayyip Erdogan’s broadsides against rate increases.

“Executives are asking the central banks to do things, which is not exactly the way to respect central-bank independence,” Mr Draghi said. “They’re asking to change the interest-rate constellation, to buy bonds and do other things.”

Mr Draghi said the ECB is less hampered by political restraint after several court cases over its emergency bond-buying plan and quantitative easing.