PARIS (Reuters) – The International Monetary Fund and the United States encouraged the European Central Bank and the Bank of Japan toward greater monetary stimulus on Friday and urged governments around the world to do their share to cultivate growth in their countries.
Calling the world economy “fragile, brittle and fragmented”, IMF Managing Director Christine Lagarde told a conference of central bankers in Paris it was “perfectly legitimate and appropriate” for the ECB and the BoJ to take unconventional steps to combat low inflation and economic stagnation.
US Federal Reserve Chair Janet Yellen said central banks “need to be prepared to employ all available tools, including unconventional policies, to support economic growth and reach their inflation targets,” especially where governments have withdrawn fiscal stimulus.
The comments came a day after the European Central Bank ordered its staff to start preparing for bolder measures if needed to fight slowing inflation, on top of a range of rate cuts, asset purchases and lending operations already agreed.
However, Indian central bank governor Raghuram Rajan said whether “more stimulus is the answer” was a good question. More economic reforms were equally important, he said.
Lagarde said governments with healthy budget positions should do more to support growth, describing as insufficient a German announcement of an extra 10 billion euros in spending on public infrastructure over the next three years.
“In this part of the world, we have to repeat over and over that monetary policy cannot be the only game in town, and that there has to be a combination of sound fiscal policies, use of fiscal space for those countries that have fiscal space in order to support growth and rejuvenate that growth,” she said. “Clearly, the announcement that was made yesterday was in the very small ballpark of what will be needed in order to do that.”
ECB Governing Council member Christian Noyer said central banks, including his own, should be prepared to buy public debt if needed to avert deflation or a run on sovereign bonds.
“Such an action may be vindicated if there are risks to macroeconomic or financial stability or even if self-fulfilling runs on public debt may be a threat to market access, or lastly to avoid the deflationary consequences of a public debt event,” Noyer told the conference.
Other speakers warned that the impact of the world’s major central banks taking divergent policy directions after a long phase of easy money could cause turmoil among currencies and increase volatility across the financial markets.
Bank of England Governor Mark Carney spoke of a probable “bumpy transition” between a period when markets have been awash with cheap central bank liquidity and a return to more normal monetary conditions.
“We’re in this – with some exceptions – low-volatility, compressed-spread environment, particularly around liquidity premia. That’s going to change as things normalise,” said Carney, who also chairs the global Financial Stability Board.