Jan. 15 (Bloomberg) -- International Monetary Fund Managing Director Christine Lagarde urged policy makers in advanced economies to fight risks of deflation that would threaten a global recovery she called “feeble.”
Less than a week before the Washington-based fund releases its new global growth forecasts, Lagarde said momentum in the second half of last year should strengthen in 2014 as developed economies gain pace. While the fund plans to raise its forecast for the global economic expansion on Jan. 21, it remains below potential of about 4 percent, she said.
Central banks in the U.S., Japan and the euro area face inflation levels under their targets while trying to accelerate growth with policies including benchmark interest rates near zero and bond-buying programs. Lagarde said that while “the deep freeze is behind,” world growth remains “too low, too fragile and too uneven,” with some 200 million people needing employment.
“The world could create more jobs before we would need to worry about the global inflation genie coming out of its bottle,” Lagarde said in a speech at the National Press Club in Washington today. “With inflation running below many central banks’ targets, we see rising risks of deflation, which could prove disastrous for the recovery.”
“If inflation is the genie, then deflation is the ogre that must be fought decisively,” she said.
Lagarde’s call for the leading economies to act to prevent a prolonged, broad decline in prices was her most pointed warning on the subject in speeches delivered since she became IMF chief in July 2011.
She recommended that central banks in the most developed economies wait until “robust growth is firmly rooted” before ending unconventional monetary policies such as asset purchases. In the U.S. “it will be critical to avoid premature withdrawal of monetary support and to return to an orderly budget process, including by promptly removing the debt ceiling threat,” she said.
In the U.S., the personal consumption expenditures index, the Federal Reserve’s preferred inflation measure, rose 0.9 percent in November from a year earlier, below the central bank’s 2 percent objective. The Fed’s trimming of its monthly bond buying to $75 billion from $85 billion, which starts this month, has been met with calm by investors so far, she said, adding that “there still could be some rough waters ahead.”
In the euro area, inflation was at 0.8 percent in December and has been below the European Central Bank’s 2 percent ceiling for 11 months. While it’s forecast to continue to undershoot the target through next year, ECB President Mario Draghi said in an interview with German magazine Der Spiegel released on Dec. 28 that “at the moment there’s no immediate need to act.”
Lagarde said ECB monetary policy could do more, including with more targeted lending.
“The euro area is turning the corner from recession to recovery, but growth is still unbalanced, and unemployment is still worryingly high,” she said. “Some countries are doing well, but others are still burdened by high debt and credit constraints.”
She praised strides Japanese officials have made to boost their economy and said more can be done. Prime Minister Shinzo Abe and Bank of Japan Governor Haruhiko Kuroda have taken steps to end 15 years of deflation in the world’s third-largest economy.
Japan’s challenge is “to agree on medium-term fiscal adjustments and social and economic reforms needed to strengthen growth,” including those to increase the share of women working, to help overcome deflation, she said.
While advanced economies recover, emerging markets must pay particular attention to risks of financial excesses, such as asset bubbles or rising debt, Lagarde said. Their less developed counterparts, which have become a “bright spot,” need to build defenses for potential shocks, she said.
Responding to questions after the speech, Lagarde said the IMF doesn’t see exchange rates between emerging and developed economies fueling a so-called currency war, a debate she said Brazilian Finance Minister Guido Mantega started about three years ago.
“We don’t see the currency war and clearly in our models, we see a much better alignment of currencies relative to fundamentals of the economies,” she said.
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