IMF warns of world economic crash if interest rates are not kept low

The International Monetary Fund (IMF) has warned that the world economy - which is growing at 3.1% compared to 3.4% last year - could crash if central banks do not continue with their low interest rates. The IMF said uncertainty and financial market volatility have increased and medium-term growth prospects 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 UK and US central banks increase interest rates which spill over into volatile financial markets, then it will pose a challenge to stabilise the economy. Lagarde also urged Japan and the eurozone to maintain their quantitative easing programmes to stimulate their economies.

After the IMF's warning, the G30 group of experts which includes former central bank governors, in a report said keeping the interest rates low for long would lead to a financial crisis. They added it would also lead to rising debt besides encouraging 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.