While macroprudential policies should remain part of the toolkit to protect the stability of banking system, the International Monetary Fund (IMF) says policy makers should focus on gradually reducing debt and on returning structural balances to precrisis levels.

This strategy would support policy credibility, while rebuilding fiscal buffers that could be deployed in a downside scenario, says the world body in its October 2011 issue of the Regional Economic Outlook: Western Hemisphere.

Given the current high levels of financial uncertainty, the IMF report says any fiscal easing now would be “premature.”

“Fiscal consolidation efforts should avoid placing an undue burden on infrastructure spending (needed to support medium-term growth), and pressures to increase recurrent spending (particularly wages) should be resisted,” the report warns.

In the financial services sector, the IMF says macroprudential policies should remain the order of the day.

“In light of heightened downside risks to a sudden stop in financing, it remains imperative to ensure that the financial and corporate sectors do not continue to build vulnerabilities,” says the report.

The organization calls the increase in wholesale funding by banks and firms “a worrying trend.” The IMF report urges banks to deploy prudent measures to discourage foreign-financed credit expansions and risk-taking.

Moreover, in the report the international organization advises authorities to remain vigilant about liquidity pressures. Rising pressures could be countered partly by macroprudential means, that is, easing of the reserve requirements, in addition to direct intervention in foreign exchange and domestic liquidity markets, if necessary, to ward off instability.

For Latin America and the Caribbean, the IMF says further efforts are required to address regulatory blind spots and bring financial oversight in-line with best practices.

tblair@dupuch.com