–‘Very Important Nuance’ in Communique Relates to Infl Expectations

By Denny Gulino

WASHINGTON (MNI) – Advanced and emerging economies have agreed that
the easy monetary policy of the U.S. and developed Europe can remain
accommodative only so long as inflation expectations remain firmly
anchored, the chair of the IMF’s steering committee told reporters
Saturday.

The head of the International Monetary Fund and the chairman of its
guiding committee described many European states — now the
beneficiaries of contributions from often less advanced, less prosperous
nations — taking “courageous” and vastly unpopular steps to put their
problems behind them with everyone else’s support.

“What was really critical in all our minds,” said the chairman of
the International Monetary and Financial Committee at the conclusion of
its meeting, “was to get back to normal growth over the medium term and
preferably sooner rather than later.”

IMFC Chair Tharman Shanmugaratnam said the medium term means
“within two or three years” and that “if we don’t get back to normal
growth, if we don’t get GDP back to its potential levels, then fiscal
sustainability isn’t possible.”

Combining fiscal reforms with structural reforms is necessary to
“bring confidence and investment back into our economies,” he said.

The 24 central bank governors, finance ministers and other top-rank
economic figures drawn from the governors of the IMF’s 188 member
countries were mostly in a mood of consensus and agreement, he and IMF
Managing Director Christine Lagarde told the reporters attending the
news conference. The gathering is one of the major concluding events of
the spring meetings of the IMF and World Bank.

Amid criticism from Latin America countries of the way central
banks in the U.S. and Europe were prolonging their low interest rates to
spur growth at the cost of many emerging economies’ less competitive
exchange rates, Tharman said even the critics are not insisting on a
monetary tightening reaction any time soon — with one condition.

“There’s a very important nuance in the statement on monetary
policy,” Tharman said. “It doesn’t just say that monetary policy needs
to remain accommodative, it says it needs to remain accommodative as
long as inflation prospects remain anchored and weak growth persists.”

He said meeting participants, many from outside the G20 and from
emerging countries, “were all pretty much of the same mind, on the
importance of ensuring that inflation expectations remain anchored, in
other words low and in check.”

At the first signs that “we’re likely to lose control of inflation
further down the road there was a general sense that monetary policy,
being very easy, would no longer be advisable,” Tharman said.

IMF Managing Director Christine Lagarde, answering questions with
Tharman, attributed some of what she saw as an encouraging impulse
toward consensus as the result of a new seating arrangement, which
intermingled the participants instead of having them facing each other
“protected” by their tables.

Lagarde said that, on the sensitive subject of IMF advice to
countries about their exchange rate regimes, that such bilateral and
multilateral surveillance would remain “one of the components” of the
Fund’s role. China has resisted the idea that the IMF should be
encouraged to keep track of whose currencies are undervalued and whose
overvalued.

Tharman said, on the delicate subject of capital controls and
exchange rate manipulation, “Compared to a year ago, we had a good
meeting of minds, pretty much a consensus, among emerging countries and
advanced countries, whether we’re talking about China or Brazil or
anyone else, we all agreed there had to be some greater flexibility in
exchange rates over time.”

“We agreed we are getting there, and we also agreed from time to
time capital flows can be very troublesome,” he continued. “The Fund has
shifted its thinking on the matter and we’ve all shifted our thinking as
to what’s a sensible took kit when faced with volatile capital flows.”

He said “there was a recognition that in instances where you face
severe volatility of capital flows some form of management of those
capital flows could be sensible.” These, he said, “were statements that
were agreed to on all sides” representing some movement of “some
distance in the last year.”

Lagarde said there is research work under way at the Fund “so that
we can really analyze in depth the relationship of capital flows and
monetary policies.”

“There is work that will continue to be done at the Fund so that we
can really analyze in depth the relationship between movement of capital
flows and monetary policies — that’s another matter which was of
interest — and there is not at this stage definite evidence of a close
correlation between the two,” she said.

Lagarde also said that Portugal’s IMF program is “on track,” and
was newly endorsed by the IMFC. “I don’t see any reason for any change
in the Portugal program,” she said.

Asked how well the advanced economies, presumably in Europe for the
most part, are prepared to undergo two to three years of austerity and
adjustment, Tharman responded, among the “Western economies there’s a
very strong resolve to get the heart of issues of competitiveness,
thrift, rebuilding of household and government balance sheets.”

He said of this resolve, “politically, it’s quite courageous” since
it’s not necessarily what the citizens expect even now. “There have been
very strong expectations built up over the years for more of the same
and it has taken tremendous political courage, particularly in the last
year, to begin to switch course and to paint a vision that leads to a
better future,” Tharman said.

“We know it’s going to be a long road. This is a multi-year
journey,” he continued. “There will be pitfalls along the way” which is
why the new resources of the IMF are “extremely important.”

“It’s going to be a very challenging journey, with politics
intersecting in economics,” he said, adding “I’m a lot more confident
now than I was a few years ago.”

“We’ll have to avoid thinking that we’ve got it all right, whether
it’s on fiscal policies or savings policies or competitiveness policies
that we’ve discovered the new golden equilibrium,” he said. “There’s a
lot of learning to do on both side.”

The IMF is not neglecting poor countries while it amasses a huge
war chest, now $430 billion larger and growing, to help much richer
countries, Lagarde said. “We don’t talk enough about the work the Fund
does with the low-income countries,” she said. “Of the 48 programs or so
that we have around the world, more than half of them are with low
income countries. They’re not for huge amounts, because everything is
proportionate.”

The “highest, largest number of technical assistance hours, days,
man or woman hours, in all sorts of matters” is now being provided to
the “Arab Spring” countries in transition, she said.

She and Tharman stressed that the new pledges of contributions will
add to the IMF’s regular resources, not to any special bailout fund, and
that the same rigorous Fund requirements will apply to everyone who
borrows, even if they are advanced European countries.

** MNI Washington Bureau: 202-371-2121 **

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