IMF urges central banks to retain easy monetary policy

The IMF urged central banks in advanced economies to keep monetary policy accommodative and prevent interest rates from "rising prematurely" yesterday (September 2), ahead of the G20 meeting later this week.

In a briefing document on 'global prospects and policy challenges' the Fund observed output gaps "are still substantial" in most advanced economies, while inflation is below target. An expected boost in economic activity from lower oil prices "has not materialised".

Consequently it is urging central banks to keep accommodative monetary policy in place and, in some cases, to prepare to ease further. The European Central Bank (ECB), it said, should extend its asset purchase programmes if inflation fails to increase fast enough.

In particular the IMF expressed concerns over falling inflation expectations and the strength of the euro, which has increased by 3.6% against the US dollar in the past six months, having fallen by 21.8% in the previous year.

In the briefing the IMF also repeated its call for the Bank of Japan (BoJ) to "stand ready for further easing" while urging the government to accelerate structural reforms in the country.

BoJ policy board member Takahide Kiuchi today warned annual inflation would remain around 0% "for the time being" in a meeting with business leaders in Aomori. It is unlikely to reach 2% in the next 18 months, he said.

The IMF suggested the BoJ consider providing "stronger" guidance to markets by adopting "more forecast-oriented monetary policy communication". This would provide more transparency around its assessment of the inflation outlook and reinforce its commitment to a 2% target, the Fund said.

Monetary policy is diverging across the globe. Whether the ECB and BoJ ease further or not, they are still entrenched in easing cycles, while the Federal Reserve is on the cusp of raising interest rates for the first time in nine years.

The IMF has made its position on the US economy clear in the past, encouraging the Fed to keep rates on hold until the first half of 2016 at the conclusion of its Article IV consultation in June.

While it did not update its assessment in the briefing document, published yesterday, it argued there was not much evidence of "meaningful" wage and price pressures, meaning the "normalisation" process was likely to be gradual.

The Fund also hinted at a communication problem, suggesting there were differences between market and Federal Open Market Committee (FOMC) expectations about the path of short-term interest rates.

The G20 finance ministers and central bank governors meet in Ankara, Turkey, on September 4–5.