Commodity Price Surge Impact
Impact on African Economies
Factors Behind Oil Price Surge
Jeddah Meeting on Oil
Policy Response to Price Surge
Haiti Interview
Norway’s Sovereign Fund
Mexico: Achieving Full Potential
Switzerland’s Monetary Policy
Mauritius: New Growth Miracle?
Policymakers face a difficult environment. They need to head off rising inflationary pressure, while also being mindful of downside risks to growth.
Many central banks have tightened monetary policy stances but interest rates in emerging and developing economies generally remain negative in real terms, particularly in countries where exchange rate management has limited monetary policy flexibility.
The risk of second-round effects from the surge in commodities prices and continued stress in financial markets complicates the response to the slowdown, particularly in advanced economies. The case for policy tightening in these economies is stronger than before the recent oil price increase but still not established, given that inflation expectations and labor costs are projected to remain well anchored and growth momentum is weak. However, inflationary pressures need to be monitored closely. In many emerging economies, particularly those that continue to operate above trend growth, monetary policy needs to be tightened combined with greater fiscal restraint and, in some cases, with more flexible exchange rate management, in order to reverse the recent build-up in inflation.
QUESTION: I remember sitting here a year ago and you saying that you did not think that the financial tail would wag the economic dog. Now, today, you are saying that the world faces a one-in-four chance of a recession. How are we to know that you are not being overly pessimistic this year while you were being overly optimistic last year?
MR. JOHNSON: Well, I think that is a fair question. I think that we make a forecast and any forecast can be wrong; most forecasts presumably are wrong. We are giving you an honest assessment of how we see the world today.
I think that everyone has learned a great deal about financial dogs and their tails, and how exactly those worked over the past year. So, on the basis of what we know today, this is our best forecast. Do ask me again next year about how we have done.
Finally, in conclusion, I would like to say that my blog at IMF.org is again up and running. Please invite your readers and listeners to ask questions or post comments there. To make things a little more interesting, while I have been speaking, I have put up a post regarding what I regard as the key messages from this morning's discussions. Thank you very much.
Finally, let me comment briefly on some policy implications of this global assessment. A key message is that, with continuing tensions and uncertainties prevailing in global markets, policymakers in both advanced and emerging economies need to respond to a potentially quickly changing balance of risks. In addition, in our view, now is the time when prudent governments will draw up contingent plans to guard against deeper "tail risks."
Priority must be given to containing financial disruptions in a durable manner. As was discussed at yesterday's press conference on our Global Financial Stability Report, a key focus must continue to be recognizing losses quickly and rebuilding financial capital.
Macroeconomic policies can play a complementary role in supporting demand and limiting the negative interaction between financial markets and the real economy.
Monetary policy remains the first line of defense. Central banks in several advanced economies, notably the United states, have appropriately eased policy rates as their growth outlooks have worsened, and may need to continue easing until their economies find a firmer footing. In the Euro Area, current inflation remains uncomfortably high, but we expect that inflation will come down over the relevant roughly two-year policy horizon in the context of slower growth. This should provide some room for future policy easing on the part of the European Central Bank.
Fiscal policy is the second line of defense. The U.S. fiscal stimulus, for example, looks likely to provide timely support in the second half of this year. However, the use of fiscal space, where available, should be temporary and not jeopardize efforts aimed at consolidating public finances over the medium term.
Given the risk of negative interplay between housing and credit markets, the so-called third line of defense—namely, the use of public sector balance sheets—may be needed to support housing and financial markets.
In the United States, steps have already been taken to ensure the availability of mortgage financing and to stem systemic risk, but more may be needed before financial and housing markets find completely stable ground.
We also cannot ignore the international aspects of the current financial crisis. Given the cross-border dimensions of exposures and counterparty risks, solutions implemented in national silos may not be adequate to resolving an underlying global problem of capital adequacy in the financial system.
In many emerging and developing economies, the challenge remains to manage inflation and overheating risks, but it will be important to respond flexibly if global downside risks intensify.
Finally, as a way to reduce global pressure on food and energy prices, more open trade policies in those products would be a good start. Less insular biofuels policy in advanced economies would help relieve some pressure. At the same time, we encourage countries to avoid raising taxes or imposing quotas on their food exports. These reduce incentives for domestic producers and also increase international prices.
