Lagarde: Don’t rush to exit on loose monetary policy

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International Monetary Fund managing director Christine Lagarde has warned central banks not to end their stimulus packages too soon.

Last week’s revision of Q2 GDP figures up to 0.7 per cent was the latest positive economic news in the UK and debate has begun over when and how the long period of loose monetary policy in the UK and elsewhere can be wound down.

Speaking at Jackson Hole on Friday, Lagarde said the overall impact of measures like low interest rates and quantitative easing had been positive and helped prevent “a collapse of the financial system and a collapse in activity”.

She added that its benefits could diminish over time but are necessary for now.

She said: “I do not suggest a rush to exit. unconventional monetary policy is still needed in all places it is being used, albeit longer for some than for others. In Europe, for example, there is a good deal more mileage to be gained from unconventional monetary policy. In Japan too, exit is very likely some way off.

”The day will come when this period of exceptionally loose monetary policy, both conventional and unconventional, must end—in line with economic recovery and its impact on inflation. We need to plan for that day, especially since we do not know exactly when it comes.

Earlier this month, Bank of England governor Mark Carney set out his forward guidance on monetary policy, explaining that the monetary policy committee would not consider rising interest rates until unemployment falls below 7 per cent or there is a greater than 50 per cent chance that inflation will be above 2.5 per cent in the next 18 to 24 months.

Lagarde said: “The fund and policy makers 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.”