Lagarde Urges Careful Exit From Monetary Stimulus to Stop Shocks

Central banks should carefully plan their exits from monetary stimulus to avoid causing sharp movements of capital, the International Monetary Fund’s Managing Director Christine Lagarde said.

A “much more subtle game” is required as policy makers phase out stimulus measures, Lagarde told reporters today at a Romanian central bank conference in Bucharest. While unconventional policies by the U.S. Federal Reserve, the Bank of England, the European Central Bank and the Bank of Japan had a “massive positive” effect on the global economy, the impact of reversing them “remains to be seen,” she said.

“The real question is for how long, when to gradually phase it out, when is the economy strong enough and demonstrably so, so that this unconventional monetary policy can be revised,” Lagarde said. “The unwinding needs to be carefully phased, planned, communicated.”

Fed Chairman Ben S. Bernanke signaled last month that the U.S. central bank may start tapering its $85 billion monthly stimulus program this year and halt the program in mid-2014 if the economy performs in line with its forecasts. ECB President Mario Draghi said July 4 that euro-area interest rates will remain low for an extended period of time and monetary policy will remain accommodative for as long as needed.

Emerging Europe is probably past the worst of the crisis, with only Croatia and Slovenia likely to remain in recessions this year compared with eight countries last year, Lagarde said.

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