Policymakers should prepare for more market volatility amid further financial tightening and “choppy” waters in the global economy stemming from trade tensions, IMF managing director Christine Lagarde said yesterday.
The fund’s advice to central bankers and finance chiefs is to continue building monetary and fiscal buffers for the risks ahead, she said in an interview with Bloomberg Television’s Haslinda Amin, at the conclusion of the IMF and World Bank meetings in Nusa Dua, Indonesia.
“Now is not the time to say, OK, fine, let’s just relax and do a bit of fiscal tolerance here and a slowing of reforms,” Lagarde said.
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On the trade disputes, “our message was very clear: de-escalate the tensions, and open and reform the dialogue,” she said.
The meetings have been dominated by talk of the twin risks of trade and monetary policy tightening, coming in a week in which stock markets from the US to Asia were roiled as investors sought cover.
Officials, including Bank of Japan Governor Haruhiko Kuroda, urged the US and China to restart talks around trade, while policymakers from emerging markets highlighted threats from US Federal Reserve-led interest rate hikes.
Indonesian central bank Governor Perry Warjiyo, faced with a tumbling currency amid the rout in emerging markets, has called for global monetary policy to be better synchronized and a multilateral response to protectionist headwinds.
Officials in Colombia and Mexico also warned of strains during the week’s meetings.
Still, Brazilian central bank President Ilan Goldfajn said emerging markets “should not complain about normalization” because the gradual moves will help prevent the need for sudden changes later on.
As for officials’ ability to deal with the next financial crisis, Lagarde said there is “still, now, limited policy space,” but that the banking system is “much stronger” with better supervision and regulations, less non-performing loans and “still sensible” leverage.
Flexible exchange rates are playing a “very good role as a shock absorber,” she said.
“There are risks out there in the system, of course, and we need to be mindful of that, and we need to make sure the buffers are rebuilt,” Lagarde said. “It’s time to buckle up.”
The IMF’s main policy-advisory panel on Saturday said that global recovery is increasingly uneven and risks are being skewed to the downside.
While global expansion remains strong, the outlook is being clouded by “heightened trade tensions and ongoing geopolitical concerns, with tighter financial conditions particularly affecting many emerging market and developing countries,” the International Monetary and Financial Committee said.
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