WASHINGTON, United States (AFP) — Investors may have become overly complacent about financial conditions, which poses the risk of a sharp downturn in markets, the IMF said Wednesday.

While policymakers must keep interest rates low to ensure the economy recovers from the COVID-19 crisis, they also must remain vigilant about potential problems, the IMF cautioned in the latest update of its Global Financial Stability Report.

“Financial stability risks have been in check so far, but we cannot take this for granted,” said Tobias Adrian, head of the IMF’s Monetary and Capital Markets Department.

With borrowing rates at record lows, and new vaccines boosting hopes of a solid recovery in activity this year, prices for stocks, corporate bonds, and other risk assets have risen, while markets have shrugged off new waves of coronavirus infections.

Markets are “betting that continued policy support will offset any bad economic news in the short term and provide a bridge to the future,” Adrian said. 

But the “disconnect between exuberant financial markets” and the lagging economic recovery “raises the spectre of a possible market correction”.

The Washington-based crisis lender, which projects global growth will recover by 5.5 per cent this year, has hammered home the message that governments should continue to provide as much economic support as possible, and Adrian echoed that call.

“Reducing or withdrawing support at this stage could jeopardize the global economic recovery,” he said.

However, amid concerns around “excessive risk-taking and market exuberance,” officials will need to address financial vulnerabilities exposed by the crisis.

While banks have sufficient capital and have maintained the flow of credit, that may change if the institutions become concerned about debt levels or creditors’ abilities to repay loans, the report cautioned.