ALEX BRUMMER: The Bank should listen to the IMF’s advice on rates

Financial stability reports have been all the rage since the great banking crisis of 2007-09.

They are intended to girdle market players against head intrusion – and to alert enforcers to unexploded ordnance.

As we have seen in the UK liability-driven investment crisis, they can explode even after danger warnings.

In its paper on global stability, the International Monetary Fund (IMF) uses Britain’s recent experience as an example of what can happen when events come together to create disaster.

Unfunded tax cuts by Chancellor Kwasi Kwarteng along with already tense market conditions caused by the strong dollar (against all currencies) and rising interest rates set off a chain reaction that put 10 million British retirees at risk.

As derivative contracts settled and lenders made margin calls, the Bank of England, in its role of financial stability, was forced to take corrective action.

Threadneedle Street’s warning of a material threat to financial stability is not very reassuring.

Where the regulators were in this episode is still a big untold story. The same global factors, the strong dollar (see below) and the aggressive tightening of monetary policy by central banks, now threaten the stability of the entire financial system.

Some 14 emerging market countries are on the brink or in default.

The dollar’s appreciation has prompted at least five central banks to intervene or threaten to intervene to stabilize their economies.

About $60 billion in assets have fled emerging-market mutual funds held largely in advanced countries.

In China, 45 percent of real estate development lending is in trouble. House price increases, with Turkey and the US as the largest increases, have put the housing market at risk.

Fortunately, while the UK has seen significant increases, the housing market does not appear to be on the danger list given the large declines expected elsewhere.

So what to do? The IMF advises that central banks put the ordeal behind them quickly and not wait too long before raising interest rates. Are you listening at the Bank of England?

And it suggests that fiscal policy should support tighter monetary policy.

It is believed that this is not yet another sideways swipe on the UK’s more comprehensive approach?

Macho dollar

The last time the US dollar boomed as it does now was in 1985, when Secretary of the Treasury James Baker convened the Plaza Accord to lower its value.

The moves have been equally violent this year, with the dollar gaining 15 percent against the euro, 10 percent against the Chinese renminbi, 25 percent against the yen and 20 percent against the pound.

As much as Americans love a strong dollar (it portrays the image of a powerful country), it’s not great for the majority of citizens who never leave the US.

It has hurt blue-chip stocks of international fame, including much of the tech sector.

Morgan Stanley says it doesn’t do much for growth and is especially harmful to exports. Nevertheless, the IMF warns against intervention.

It argues that foreign currencies will recover as other central banks catch up with the US Federal Reserve’s aggressive rate hikes and adjust to meet the energy challenge behind the rise in inflation.

Perhaps a crisis in other bond markets – outside of Britain – is needed to trigger concerted action to end the potential damage to stability.

Closed shop

Those attending the first in-person IMF and World Bank meetings since the pandemic are faced with a very different place.

Hard copies of documents such as the World Economic Outlook report, along with dozens of others, have been banned on the grounds of climate change. They are only online.

Perhaps the residents here never learned of the massive electricity capacity needed to power online activities. Only Facebook requires a pair of Hoover Dams.

Washington is a different place. Many of the most established restaurants, such as Pesce, known for its locally caught seafood, are permanently closed alongside the luxury emporium, Georgetown Park shopping center and the Mazza Gallerie, once home to the iconic Neiman Marcus department store.

In some ways, the US seems more damaged by Covid than Britain, despite massive interventions from Donald Trump and Joe Biden. Curious!