IMF: Central banks must tighten carefully

Worries about the strength of the US economy have injected some uncertainty into the timing of the Fed’s first move.

Written by Reuters | Washington | Published: October 13, 2013 3:10:10 am

Central banks of advanced economies must try to limit collateral damage to emerging markets when the time comes to tighten monetary policy,the International Monetary Fund’s (IMF) steering panel said on Saturday.

The panel acknowledged that the ultra-accommodative policies first embraced by the US Federal Reserve and other major central banks during the 2007-2009 crisis have supported world growth and remain appropriate.

But as growth strengthens,the shift to a more normal policy stance should be “well-timed,carefully calibrated and clearly communicated”,the International Monetary and Financial Committee (IFMC) said in a statement. A wave of selling spread quickly through world financial markets this year after the US Federal Reserve said it could start winding down its massive stimulus programme by year end.

The pain was felt most severely in developing countries as the gusher of cheap dollars that had poured into their economies dried up,sparking a sharp slide in stock prices and currencies and pushing up local interest rates.

“Global financial stability is a shared responsibility,” said Ewald Nowotny,a member of the European Central Bank’s Governing Council. “The Fed should therefore clearly communicate the path of its intended policy actions to minimise negative spillovers on developing economies.”

While emerging markets’ pace of growth has slowed of late,the IMF still expects expansion in these countries to account for “the bulk of global growth”. But policymakers from Jakarta to Sao Paulo feel vulnerable in the current environment,particularly those dependent on foreign capital inflows to finance budget deficits.

Worries about the strength of the US economy have injected some uncertainty into the timing of the Fed’s first move. But few doubt the US central bank will wait very long,and that could reignite turmoil.

“The assumption that the asset price correction that began this summer has already been largely completed does not seem to be plausible to us,” said Russian finance minister Anton Siluanov.

IMF Managing Director Christine Lagarde said the fund “is prepared to deploy its resources when requested to support its members,including in conjunction with regional financing arrangements”.

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