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Lagarde urges central banks to cooperate on policy moves

Mark Wilson, Getty Images News

As the Federal Reserve debates the timing of its first interest rate hike since 2006, International Monetary Fund (IMF) Managing Director Christine Lagarde is urging central banks to cooperate on policy moves.

"I know that this topic has some very vocal skeptics, but also very ardent supporters," Lagarde said at the European Central Bank (ECB) Forum on Central Banking in Sintra, Portugal late Sunday.

"As the crisis has taught us, in times of distress, the potential gains from cooperation can be huge. Cooperation essentially reduced the risk of tail events with large international feedback effects," she added.

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The Fed and the Bank of England are expected to start raising interest rates in 2015.

The Fed's decision to unwind quantitative easing last year threw emerging markets into turmoil, prompting sharp currency and equity market declines in India, Indonesia, Brazil, South Africa and Turkey, and underscoring the impact of Fed policy on global markets.

Emerging market central bankers have since stepped up calls for policy transparency among central banks.

India's central bank chief Raghuram Rajan –among the most vocal on this issue– called for greater focus on how central bank policies affect other countries.

The case for policy cooperation may seem less compelling as urgency fades with the global economy turning a corner and as the gains from cooperative policy responses are unclear, said Lagarde.

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"But it is precisely this uncertainty that would make us remiss in discounting the gains from cooperation in a post-crisis world," she said.

"Think of the coordinated cut in policy interest rates in key countries at the height of the crisis, or the swap arrangements that the Fed instituted with other major central banks. These actions helped preempt financial market dislocation across the globe," she added.

Read MoreWill emergingmarkets throw a tightening tantrum?

That said, monetary policy cooperation is not the only approach for mitigating financial risks.

"By the same token, good fundamentals also matter. There is no short cut or substitute to sound policies in fending off excessive volatility. Reducing vulnerabilities and reinforcing macroeconomic and financial frameworks should be the order of the day for emerging markets-and indeed for all countries," Lagarde said.

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