IMF Chief Asks Staff to Examine Consequences of Negative Rates (FT)
Last Modified: 11:21 AM, Tue Oct 08, 2019

James Politi in Washington

FT.com. 08 October 2019

IMF Managing Director Kristalina Georgieva said today that the Fund would "accelerate" its work on the pitfalls of negative interest rates as one of its first steps under her leadership. She urged countries to use monetary policy "wisely" in the face of a "synchronized slowdown" in global growth. "Obviously, if we were to be going through a more prolonged period of low to negative interest rates we ought to more seriously think about the consequences, as well as what an exit strategy might look like," she said. Georgieva also said trade tensions have put a significant drag on the global economy. By 2020, losses from trade uncertainty - including the secondary effects on confidence stemming from tariffs - would reach $700b, equivalent to the value of Switzerland's economy, she noted. "The current rifts could lead to changes that last a generation - broken supply chains, siloed trade sectors, a 'digital Berlin Wall' that forces countries to choose between technology systems," she warned.

Kristalina Georgieva urges countries to wield monetary policy wisely amid 'synchronised slowdown'

Kristalina Georgieva, the IMF’s managing director, has asked staff to look more closely at the risks of negative interest rates for the world economy, urging countries to use monetary policy “wisely” in the face of a “synchronised slowdown” in global growth. 

In a phone interview with the Financial Times, Ms Georgieva, the 66-year-old Bulgarian economist who became IMF chief on October 1, said the fund would “accelerate” its work on the pitfalls of negative interest rates as one of its first steps under her leadership. 

“Obviously if we were to be going through a more prolonged period of low to negative interest rates we ought to more seriously think about the consequences, as well as what an exit strategy might look like,” she said. 

Ms Georgieva’s comments to the FT came as she offered a downbeat assessment of the world economic outlook, which has been buffeted by political risk and rising trade tensions, in a speech in Washington on Tuesday. The IMF in July predicted that world growth would slow to a rate of 3.2 per cent this year before rebounding to 3.5 per cent in 2020, but Ms Georgieva said there would be “downward revisions” to the figures for both years when the fund releases a new set of forecasts next week.

“In 2019, we expect slower growth in nearly 90 per cent of the world,” Ms Georgieva said in her speech. “The global economy is now in a synchronised slowdown.”

Ms Georgieva said trade tensions — which have increased since Donald Trump become US president in 2017 — have put a significant drag on the global economy. By 2020, losses from trade uncertainty — including the secondary effects on confidence stemming from tariffs — would reach $700bn, equivalent to the value of Switzerland’s economy, Ms Georgieva noted.

“We have spoken in the past about the dangers of trade disputes. Now, we see that they are actually taking a toll,” Ms Georgieva said, adding that in additional to stagnant global trade, the decoupling of the major economies was also a growing concern.

“The current rifts could lead to changes that last a generation — broken supply chains, siloed trade sectors, a ‘digital Berlin Wall’ that forces countries to choose between technology systems,” she warned. 

Ms Georgieva said there was now sufficient evidence that “nobody wins” from trade disputes. “Some lose more than others,” she said. 

The IMF has called on central bank to pursue loose, or accommodative, monetary policy in the face of the slowdown if they needed a dose of stimulus, but Ms Georgieva acknowledged they were grappling with their mandates under “difficult circumstances”.

“They should communicate their plans clearly, remain data dependent, and where appropriate keep interest rates low. Especially since inflation is still subdued in many countries and overall growth is weakening,” she said in her speech. 

However, in both her speech and comments to the FT, Ms Georgieva noted that there could be unintended consequences as central banks push interest rates deeper into negative territory.

Ms Georgieva suggested the IMF would be exploring the “search for yield” that was driving funds and companies towards riskier investments, as well as the distributional impact of low and negative interest rates.

Negative interest rates have spread across the eurozone and other European countries as central banks have sought to stimulate sluggish growth. Last month, Mr Trump called on the Federal Reserve to slash interest rates to “zero or less”, although Jay Powell, the US central bank’s chairman, said the Fed was not considering any such move. 

The incoming IMF head said that with monetary policy so constrained, it was important for countries to gear up for a fiscal response to the slowdown, if it ends up being sharper than expected.

“Let me be clear. We are not there. But when it comes to preparing for the possibility of a co-ordinated response we should remember the advice of Shakespeare: ‘Better three hours too soon, than a minute too late’,” she said.

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Publication: FT.com
Organization: Financial Times, Federal Reserve, International Monetary Fund
Location: Switzerland, Washington, US
People: William Shakespeare, Donald Trump, Jerome H. Powell, Kristalina Georgieva, James Politi
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Global Economy, Negative interest rates, Global economic growth, Trade disputes, Global Economy, Economy, World, Monetary policy, Global trade
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