The world must prepare for a protracted period of turbulence in the financial sector that will have far-reaching consequences for global growth, the International Monetary Fund (IMF) said yesterday.

The organisation said that the sub-prime mortgage meltdown in the United States and other forms of risky credit that have caused massive liquidity problems showed the need for wide-ranging change in the way in which financial markets are run.

In its latest Global Financial Stability Report, the IMF set out a list of reforms that regulators, investors and financial institutions must make to deal with the credit squeeze.

“The potential consequences of this episode should not be underestimated and the adjustment process is likely to be protracted,” the report said. “Credit conditions may not normalise soon.”

The IMF called for reforms in five areas. It said that more accurate and timely information was needed about how banks manage risks and their off-balance sheet vehicles. It said that the process of financial innovation needed to be re-examined, particularly whether mortgage companies lacked the incentive to monitor the risks to their securitised loans. Ratings agencies were another source of concern, it said, as they might have become too close to the creation of the products that they had rated. Equally, investors were told to “look behind the ratings”. Banks that held thinly traded complex products needed to reconsider how they can price them to factor in the risk of a drop in liquidity.

Finally, banks needed to realise that the risk to their reputations could force them to accept losses from securities held off-balance sheet, even if they had tried to avoid being responsible for their assets. The report concluded that “policymakers now face a delicate balancing act” to ensure that companies strengthen their systems for managing risk.

Rodrigo de Rato, the IMF’s managing director, said: “Credit markets are correcting, but slowly. We aren’t at a stage of normality.”

Last night Andrew Sentance, one of the most hawkish members of the Bank of England’s Monetary Policy Committee, undermined speculation that the Bank might cut interest rates rapidly. He said that the full implications of the crisis were far from clear. “It is not practical for policymakers to try to offset every shock [arising from the global economy].”

Times Recommends

• Minister in talks with Saudis to protect creditors
• Premier Inn hits back in £29-a-room row
• Bankers hit back at 'populist' bonus supertax