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IMF sees risk in advanced economies cutting back stimulus too quickly

The Federal Reserve building in Washington, D.C.
Andrew Harrer | Bloomberg | Getty Images
The Federal Reserve building in Washington, D.C.

Advanced economies, including the United States, must avoid pulling back stimulus too quickly given the weak global economic recovery and recent market volatility highlights key risks in some emerging markets, the International Monetary Fund said on Wednesday.

The IMF said there was scope for better coordination of central bank exit plans, something many emerging market policymakers have called for as the Federal Reserve has begun to wind back its U.S. support for the economy.

In a briefing note prepared for upcoming Group of 20 meetings, IMF staff said the outlook for global growth was similar to its last assessment in January, with growth of about 3.75 percent seen for this year and 4.0 percent in 2015.

(Read more: U.S. sees emerging market woes as focal point at G20)

But there were new risks from very low inflation in the euro zone and emerging markets needed sound economic policies and flexible exchange rates to weather turbulence.

"Capital outflows, higher interest rates, and sharp currency depreciation in emerging economies remain a key concern and a persistent tightening of financial conditions could undercut investment and growth in some countries given corporate vulnerabilities," the note said, ahead of meetings of G20 finance ministers and central bank governors in Sydney on Feb 22-23.

Some emerging market policymakers have blamed the Fed for market upsets in January and last year, when the U.S. central bank began to mull withdrawing its stimulus. The Fed has started to slow the pace of its asset purchases, which have been trimmed to $65 billion per month over the last two months.

The IMF said there was scope for better cooperation on unwinding unconventional monetary policy, such as wider central bank discussion of exit plans, and urged the Fed to beware of ending its support too quickly.

"With prospects improving, it will be critical to avoid a premature withdrawal of monetary policy accommodation, including in the United States," the IMF said.

(Read more: U.S. concerned about Japan domestic demand outlook)

In the euro area, the European Central Bank should ease policy further and the Bank of Japan should do the same if progress toward its 2 percent inflation target reversed or stalled.

Australian Treasurer Joe Hockey said earlier on Wednesday Australia will use its presidency of the group of advanced and emerging economies to push for agreements on strengthening global growth and to generate ideas on funding public infrastructure.

(Read more: Ukraine violence, Venezuela protests alarm investors)

The IMF said an economic analysis showed implementing a set of structural reforms, including fiscal and labor market changes and infrastructure investment, would add 0.5 percentage points to annual global economic growth over the next five years.

—By Reuters

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