IMF Managing Director Christine Lagarde (left) and International Monetary and Financial Committee Chair Tharman Shanmugaratnam before the start of a meeting of the IMFC during the IMF-World Bank Annual Meetings 2013 in Washington yesterday.
WASHINGTON: 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 steering panel said yesterday.
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 said in a statement.
A wave of selling spread quickly through world financial markets this year after the Federal Reserve said it could start winding down its massive stimulus program 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.
Since 2008, the Fed has held interest rates near zero since and has roughly tripled its balance sheet to about $3.7 trillion. In the last year, it has been pumping $85bn into the US financial system each month through bond purchases.
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 policy makers from Jakarta to Sao Paulo feel vulnerable in the current environment, particularly those dependent on foreign capital inflows to finance budget deficits.