Policymakers hailed on Monday the return of calm to financial markets, after the U.S. Federal Reserve cut the rate at which it lends to banks, and insisted that the wider economy would not be unduly harmed.
But experts said it was too soon to discount a full-blown global credit crisis.
As shares climbed, French Economy Minister Christine Lagarde said she believed the worst of the credit turmoil had passed. "I think the worst of the crisis is behind us. I don't exclude that, particularly in America, a number of funds could find themselves in difficulty but this is a classic phenomenon of American finance which is often guilty of excess," she told BFM radio.
The Bundesbank said the outlook for the global economy remained positive despite recent market tension, which represented a "welcome normalisation," albeit an abrupt one. "Nevertheless, the risks for the global economy have increased with the correction process in the U.S. property market," the German central bank said in its monthly report.
IMF chief Rodrigo Rato took a similar view, telling reporters in the Mozambican capital Maputo: "There will be some impact on growth but we still believe that prospects for the world economy are good."
Asian stock markets rallied strongly on Monday after the Federal Reserve cut the discount rate that governs direct loans to U.S. banks on Friday by a hefty half percentage point to 5.75%.
European shares also climbed, with the FTSEurofirst 300 index of leading European shares up 1%. The Dow Jones industrial average opened 28 points higher on Wall Street.
A credit crisis has snowballed in recent weeks as defaults on risky U.S. subprime mortgages hit banks across the globe, fuelling fears of financial instability and a credit squeeze, and prompting central banks to pour cash into money markets.
Central banks remained on alert on Monday. In the wake of the market turmoil, investors have sharply altered their forecasts for monetary policy. They now expect the Fed to cut its key fed funds target rate and are no longer pricing in rate increases from the Bank of England.
The European Central Bank said it would again allot more funds than strictly necessary at its weekly tender, but aimed to reduce surplus liquidity in the short-term euro money market gradually as conditions normalised.
Australia's central bank also injected a sizeable amount of liquidity into the banking system, seeking to temper upward pressure on some short-term money market rates.
But few investors are confident all the troubles stemming from the U.S. home loan market have yet seen the light of day, and they fear further market turmoil would cut economic growth.
"The Fed's move has given everyone a psychological boost. It's a short-term thing, though. It doesn't deal with the longer-term issues, the underlying problem from the decelerating housing sector in the United States," said Song Seng Wun, economist and head of research at CIMB in Singapore.
Richard Shelby, a member of the U.S. Senate's Banking, Housing and Urban Affairs Committee, said banks would increase their mortgage rates in the coming weeks, exacerbating tight credit. "I think it will get worse before it gets better," Shelby said in Brussels. "There will be firms that will not survive. I don't think we should bail them out."
More than half of U.S. primary dealer banks polled by Reuters now predict the Federal Open Market Committee will lower its key fed funds rate at its September 18 meeting, or even before.
Broader Economy in Focus
The European Central Bank may still raise rates next month but is likely to stop there. "Monetary policy is still tending towards being expansively orientated," the Bundesbank said.
However, the Bank of Japan now seems unlikely to tighten at this week's meeting. Until recent days, a quarter-point increase to 0.75 % had been widely forecast.
"I would like the BOJ to keep overall market movements in mind," Japanese Vice Finance Minister Hiroki Tsuda said.
Others, notably Bank of England Governor Mervyn King, say it is not the job of monetary policy to bail out poor investments unless they threaten the broader economy.
History shows that cutting rates at times of market turmoil can have lasting consequences.
The Fed cut rates after U.S. hedge fund LTCM came close to collapse in 1998 and stock markets were soon soaring into the dotcom bubble. UK rate cuts after the 1987 stock market crash were quickly reversed as the economy hit an uncontrolled boom.