It may be too early for central banks to start detailing strategies to unwind unprecedented policies to boost the economy, Mexican Central Bank Governor Guillermo Ortiz said on Saturday. In an interview on the sidelines of the annual meeting of central bank governors at the Bank for International Settlements (BIS), he said the global economic downturn was past its worst but recovery is not yet secured.
“It may be premature to go into a lot of details about exit strategies at this point, it’s important to have that subject in mind but I think that we are not out of the woods yet,” said Ortiz, who is also chairman of the BIS board.
“One important question is whether these green shoots actually take root and the incipient recovery which we see in some parts of the world is sustainable,” he said.
Central bankers from around the world are gathering this weekend at the BIS headquarters in Switzerland, where hot topics include the improving outlook and the need for the authorities to unwind huge support for the economy and the financial system.
Ortiz said safety nets for the financial sector could not be permanent, urging active dialogue among G20 countries on their removal.
“This will be a central thing at the G20, to try to if not coordinate, at least be very much in contact on the rollback of safety nets ... and also extraordinary measures to support the financial system,” he said.
Central banks, for their part, had to be careful on the timing of their exit from a period of low interest rates and generous liquidity supply.
“Eventually they will have to be rolled back, it’s important not to do it prematurely but also not to take too long — the question of timing is of the essence,” he said.
A pick-up in commodity prices had eased the risk of deflation in all but a few developed countries, but was also threatening to tie the hands of emerging market central banks because of its implication on inflation.
“What is worrying is that the rising commodity prices may put some emerging markets again in a situation where the degree of freedom in terms of monetary policy is constrained,” he said.
Ortiz said though the collapse in economic growth was synchronized globally, the recovery appeared to be uneven with emerging markets picking up more quickly.
In many emerging economies, an improvement was already showing up in the second quarter but final demand remained weak in the US, Europe and Japan.
“The performance of emerging markets, particularly in Asia, has been stronger than anticipated and that is also true in some emerging markets in Latin America,” he said.
“In my view the recovery in the world economy will only be sustainable if final demand — consumption, investment and so on — can be sustained in the major economies. It would be difficult to think in the absence of such a recovery in final demand, that emerging markets by themselves could sustain a recovery,” he said.
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