Lagarde says easy monetary policy should stay for now

Reuters/New York

Global growth is likely to remain tepid this year and central banks should keep their easy monetary policy in place, the head of the International Monetary Fund said yesterday.

“Thanks to the actions of policymakers, the economic world no longer looks quite as dangerous as it did six months ago,” IMF Managing Director Christine Lagarde (pictured) told the Economic Club of New York.

But while there were signs that financial conditions are improving, Lagarde said those changes were not yet translating into improvements in the real economy.

“In present circumstances, it makes sense for monetary policy to do the heavy lifting in this recovery by remaining accommodative,” Lagarde said ahead of meetings of global finance chiefs in Washington next week.

 “We know that inflation expectations are well anchored today, giving central banks greater leeway to support growth,” she added.

She said a three-speed recovery was underway led by fast-growing emerging economies, followed by countries like the US that were on the mend, and the eurozone and Japan trailing.

Lagarde said exceptionally loose monetary policy of central banks in advanced economies was a concern for emerging economies, which fear a sudden reversal of the large capital flows that have flooded their economies in recent years as investors sought higher yields.

“Right now, these risks appear under control,” Lagarde said but urged emerging economies to boost their defenses to deal with the possible repercussions should central banks start to exit from quantitative easing.

The IMF chief welcomed the unprecedented burst of monetary stimulus announced by the Bank of Japan last week to revive its economy. She urged Japan to deliver a credible fiscal plan to lower its public debt “which looks increasingly unsustainable”.

“Japan needs a clear and credible plan to lower public debt over the medium term,” Lagarde said. “It needs comprehensive structural reforms to shift the economy into higher gear.”

Lagarde said the ‘fiscal cliff’ in the US had been avoided but it was vital now for the Obama administration to put in place credible, medium-term plans to cut debt.

In Europe, Lagarde said monetary policy was “spinning its wheels” with low interest rates unable to translate into affordable credit for those who need it because of unfinished repairs to the banking sector.

“The priority must be to continue to clean up the banking system by recapitalizing, restructuring, or, where necessary, shutting down banks,” she added.