The organisation’s latest Global Financial Stability Report highlighted how recent months have seen continued appreciation in risk asset prices and a depreciation of the US dollar, alongside rising government debt and the growth of non-bank financial intermediaries and stablecoins.
“Valuations of risk assets appear stretched, especially as the global economy slows, and concentration risks in certain segments have reached historic highs,” the report said.
Although financial conditions across regions have eased over the past six months – following tariff announcements and a tightening in April – the IMF warns that this apparent calm may be concealing deeper risks.
“Beneath the calm surface, the ground is shifting in several parts of the financial system, giving rise to vulnerabilities,” the report said.
The IMF cautions that a sudden correction in asset prices could be intensified by unusual asset correlations, potentially triggering deleveraging and straining financial markets.
“This strain could include foreign exchange markets, which have undergone structural shifts yet have not experienced significant dollar weakness.”
While recent economic data surprises had trended negative until recently, equity market sentiment has remained high, fuelled by optimism surrounding mega-cap stocks in the information technology and artificial intelligence sectors which are seen as more resilient to tariffs.
“The current AI boom presents some parallels with the dotcom boom of the late 1990s. Market optimism about a new technology – the internet then, AI now – is pushing up stock valuations, fuelling a tech-centred investment boom, and sustaining consumption on the back of strong capital gains. This could push the neutral interest rate up.”
An abrupt repricing of these tech stocks, the IMF warned, could be sparked by disappointing earnings or underwhelming productivity gains tied to AI – potentially marking the end of the current investment boom and creating wider implications for financial market stability.
“History reminds us that asset prices can abruptly correct following booms in the technology sector,” the IMF said.
IMF: Global economy resilient, slowdown emerging
In its latest World Economic Outlook, also released this week, the IMF said markets appear to have underestimated the potential impacts of tariffs on growth and inflation.
While the global economy has shown signs of resilience, the IMF noted a slowdown is starting to emerge as the effects of front-loaded consumption and investment begin to fade.
“In addition, market expectations for near-term US inflation remain elevated amid high trade policy uncertainty, whereas euro area inflation expectations have anchored as oil prices have declined.”
Global financial stability risks, the IMF said, remain high and have eased only slightly since April 2025.
“Equity markets have rebound to record highs, corporate and sovereign funding spreads are at historically narrow levels and global funding liquidity remains abundant.”
AMP chief economist Shane Oliver told InvestorDaily the data reflects the US tariffs not causing as much disruption as feared but said this was due to other countries avoiding a trade war and cutting deals and US President Donald Trump backing down.
“Sharemarkets have already moved up to reflect this and there is the risk that the full impact of the tariffs are yet to show up and of course US/China problems are yet to be resolved and may be flaring up again,” Oliver said.
The IMF said global growth is projected to slow from 3.3 per cent in 2024 to 3.2 per cent in 2025 and 3.1 per cent in 2026. Advanced economies are expected to grow around 1.5 per cent, with emerging market and developing economies just above 4 per cent.
In Australia, growth is expected to stay steady at 1.8 per cent for 2025. However, the IMF downgraded its July forecast for 2026 from 2.2 per cent to 2.1 per cent. Meanwhile, the organisation predicts Australia’s real gross domestic product growth will hit 2.3 per cent in 2030.
Betashares chief economist David Bassanese told InvestorDaily the main risk is homegrown.
“Inflation holds up as the economy recovers – meaning the RBA will be less generous in cutting rates and promoting growth,” he said.
Increased pressure on central banks
The IMF is estimating Australian consumer prices will rise to 3.0 in 2026, up from 2.6 in 2025, data the RBA will consider when making rate calls.
“Rates should return to normal or around 3 per cent provided underlying (trimmed mean) inflation falls to 2.5 per cent,” Bassanese said.
AMP’s Oliver said the central bank believes monetary policy is still slightly tight.
“Inflation is still heading back to the 2.5 per cent target and so [the RBA] should be able to respond with still more rate cuts, particularly with unemployment at 4.5 per cent and above RBA forecasts,” he said.
According to the IMF, growing pressure on the independence of major economic institutions – such as central banks – could undermine policy credibility and impair effective economic decision making, especially where data reliability is compromised.
“Should these pressures succeed, many of the hard-won credibility gains achieved in policymaking over many decades could be lost. Trust in central banks and in their ability to deliver price stability allows inflation expectations to remain well anchored even when the economy is hit by large shocks, such as during the recent cost-of-living crisis.
“Monetary policy should remain tailored and transparent. Preserving the independence of monetary policy institutions is a precondition for macroeconomic stability.”
Global FX markets ‘vulnerable’ to macrofinancial uncertainty
Finally, the IMF warned that during periods of macrofinancial uncertainty, a flight to quality and increased hedging demand can raise foreign currency funding costs and impair liquidity in FX markets.
“[Macro] shocks can raise funding costs, widen bid-ask spreads and intensify excess exchange rate return volatility.”
“These pressures may be exacerbated by structural fragilities in the foreign exchange market, including large currency mismatches, concentrated dealer activity, and increased NBFI involvement,” the report said.
Stress in foreign exchange markets, the IMF added, could spill over into other asset classes, tightening broader financial conditions and potentially threatening macroeconomic stability.
