IMF backs unconventional monetary policies despite warnings

Unconventional monetary policies of central banks in Europe and Japan received an endorsement from the International Monetary Fund yesterday, even as policymakers from emerging markets warned that such policies were increasing risks for the global economy.

The debate over the merits of such policies comes days before major central banks such as the US Federal Reserve, the Bank of England and the Bank of Japan unveil their interest-rate decisions.

At the conclusion of a three-day IMF event in New Delhi, the fund's chief, Christine Lagarde, said countries should continue with unconventional monetary policies if they were accompanied by structural reforms and low inflation. "Monetary policy is needed but [it] cannot be the only game in town," Ms Lagarde said.

Vocal critic

Speaking at the same event on Saturday, India’s central bank chief Raghuram Rajan, a vocal critic of such policies, had said that the costs of them were increasing even as the benefits seemed to be diminishing.

He called on global central banks to adopt a system to assess the wider impact of their actions, including unconventional monetary policies now in use.

The European Central Bank last week eased monetary policy further by cutting all its main interest rates, expanding asset purchases and launching a loan programme that could see it pay banks to lend to firms and households.

The Bank of Japan has also taken interest rates into negative territory for the first time while the US Federal Reserve is expected to tighten monetary policy gradually after years of near-zero rates and quantitative easing. Mr Rajan proposed that a group of academics should measure and analyse the “spillover” effects of monetary policies and indicate which should be used and which avoided.

His idea struck a chord with policymakers from other emerging markets. Sukudhew Singh, deputy governor at Bank Negara Malaysia, said the proposal was worth looking at.

Distortions

“We need to first assess how these policies are affecting, what kind of distortions are being created,” he said. “Only then, we can look for remedial measures.”

While negative interest rates in Europe and Japan are sending yield-chasing investors into emerging markets, their policymakers fear further interest rate increases in the United States could ignite massive outflows.

When Mr Rajan took over as Reserve Bank of India governor in September 2013, India and other emerging economies such as Indonesia and Brazil were battling a currency crisis sparked by fears the US Fed would begin tightening policy, exposing their crippling current-account shortfalls.

That experience has made them strong critics of the kind of stimulus measures adopted by developed economies in recent years. – (Reuters)