IMF cautions countries against withdrawing stimulus

International Monetary Fund (IMF) chief Christne Lagarde has cautioned the countries across the world against withdrawal of stimulus or unconventional monetary policies (UMP).

Lagarde yesterday asserted that the stimulus helped support economic stability at both domestic and global level.

Early in the crisis, the UMP helped prevent a collapse of the financial system and a collapse of activity, she said.

"Let me say it up front: I do not suggest a rush to exit. UMP is still needed in all places it is being used, albeit longer for some than for others," she said.

Arguing that in Europe more mileage to be gained from UMP and in Japan too, exit is very likely some way off, she said the path to exit will and should depend on the pace of recovery, the latter mitigating the potential downsides of the former.

"This calculus will not be easy, however. Together, we need to keep an eye on both financial stability and growth. Together, we need to watch whether the benefits of UMP are subject to diminishing returns. Together, we need to analyse whether the financial side-effects get worse over time," she said.

Just as with entry, exit will take into uncharted territory, she said.

"Yet I remain optimistic. Central banks handled entry well, and we see no reason why they should not handle exit equally well," she said.

"So, the Fund and policymakers need to start thinking about what exit will eventually look like. That includes the implications for global economic and financial stability: the whole system, not just one part of it. This is an issue that the Fund has been watching and will continue to watch closely. It is, after all, the IMF's raison d'être," she said.

Lagarde said today's calculus of stimulus benefits is still clearly positive for stimulus countries.

Noting that advanced and emerging countries have generally done a good job managing the policy implications from stimulus, she said that following the initiation of UMP, there has been episodes of asset price increases and rising capital flows—by one measure, cumulative net flows to emerging markets rose by USD 1.1 trillion since 2008, squarely above its long-run structural trend by an estimated USD 470 billion.

"Corporate leverage and foreign exchange exposures also increased in several cases. Real estate prices have been buoyant, for example, in Brazil, Canada, China, Korea, and Thailand," she said.

"Stock prices rebounded for a considerable time in China, Mexico and Russia. And credit expanded rapidly in Brazil, China, Korea and Turkey. In recent months, some of these developments have been partly reversed," she said.

According to the IMF chief, in the long-term it is clear that exit from stimulus will involve phasing out, and ultimately reversing all of these policies. That does not mean that they will all occur at the same time.

"Indeed, it seems likely that some of the more 'conventional' aspects of UMP, such as guidance on the future path of policy rates or the rate of future asset purchases, will be adjusted well before any assets are sold. This means that exit from UMP is likely to be slower and longer than is often portrayed, and feared," she said.

"It is also safe to assume that exit will depend on progress on other policies and on the durability of the recovery. In fact, for exit to be understood and digested as smoothly as possible by the markets, it needs to be contingent on the strengthening of the economy," said  Lagarde.