In a recent report, the IMF identified potential sources of financial instability in the global economy. It advised Central Banks to continue raising interest rates to ‘neutral’ levels, that neither inhibit nor facilitate economic growth. It warned that raising rates too high or not enough would have negative consequences that could echo throughout the global economy. It is important that central banks raise rates high enough to prevent speculative bubbles- which may already exist- from expanding to unsustainable levels. On the other hand, it is important that central banks do not raise rates too high, so as to stifle liquidity in capital markets. The banks must tread delicately.

In addition, the IMF warned that trading in complex financial securities could prove to be dangerous, as such securities have never been tested in times of financial distress. Derivatives and collateralized debt obligations are two such examples. Both of these securities are traded by the most sophisticated individuals and institutions, who all make use of the same financial models. As a result, a period of prolonged financial distress could cause investors to sell the securities en masse. New Zealand’s Stuff.com reports:

Emerging markets so far have benefited from improved financing conditions over the past two years, which have stemmed in part from increased global liquidity but also from increased reliance on domestic capital markets, the IMF said. But it also said that many emerging markets "continue to face considerable maturity and currency mismatches on their balance sheets."

Read More: Big rate rises risk financial stability – IMF