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IMF chief says easy monetary policy should stay for now

International Monetary Fund (IMF) Managing Director Christine Lagarde speaks during a meeting with China's President Xi Jinping (not picture
International Monetary Fund (IMF) Managing Director Christine Lagarde speaks during a meeting with China's President Xi Jinping (not picture

By Daniel Bases and Steven C. Johnson

NEW YORK (Reuters) - Global growth is likely to remain tepid this year and central banks should keep their easy monetary policies in place, the head of the International Monetary Fund said on Wednesday.

"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 told the Economic Club of New York.

But while there were signs that financial conditions are improving, Lagarde said those changes are 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 is underway, led by fast-growing emerging economies, followed by countries such the United States that are on the mend, and with the euro zone and Japan trailing.

In January, the IMF trimmed its 2013 forecast for global growth to 3.5 percent from 3.6 percent, and projected a 4.1 percent expansion in 2014. It said the world economy grew 3.2 percent in 2012.

Lagarde said the exceptionally loose monetary policies of central banks in advanced economies is 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 have sought higher yields.

"Right now, these risks appear under control," Lagarde said, but she 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 the country's 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 United States had been avoided, but that it is vital now for the Obama administration to put in place credible, medium-term plans to cut debt.

In Europe, Lagarde said monetary policy is "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," Lagarde added.

The banking bailout in Cyprus, she reiterated, is not a template for future reforms. However, she said people, "whether investors or depositors need to know what the banking order is".

Cyprus received a 10 billion euro bailout from the euro zone and the IMF. However, the structure of the deal has injected a higher level of uncertainty into markets because it requires large depositors, many of them Russian, to share in the losses of the banking system.

"Cyprus was not a template, it doesn't set standards because it was not a standard itself. It was vastly different from many banks in the region," Lagarde said in response to a question.

In addition to banking reform, most European governments need to maintain tight fiscal policies to reduce debt levels, she said, but added that spending cuts need not be too severe too soon.

"We believe it is a question of pace," Lagarde said. "(Reforms) don't have to be brutal or abrupt or massively front-loaded. Those under financial pressure have to demonstrate the ability to do so but be mindful of the fabric of society."

The IMF's spring meeting will be held in Washington April 19-21.

(Writing by Lesley Wroughton; Editing by Chizu Nomiyama; and Peter Galloway)

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