Downside risks to global growth outlook remain, IMF warns
2012-03-02 15:43:36
Risks to global economic growth remained "squarely to the downside," the International Monetary Fund warned in a note to Group of Twenty finance ministers during their meeting in Mexico City over the weekend.
In the report prepared by IMF's Research Department and published only on Thursday, the Fund said, however, the recent policies and financial market developments have lowered the probability of a sharp global slowdown.
The report urged euro area to build on recent measures and act decisively on multiple fronts to achieve a successful resolution to the crisis. The Fund also demanded policymakers to quickly implement the agreed "fiscal compact".
It observed that the European Central Bank's 3 year long term refinancing operation has improved market sentiment, relieving pressures on euro area banks and sovereigns.
The Washington-based lender urged the European authorities to increase the available capacity of the European firewall by around $500 billion to adequate levels. It pointed out that this could be achieved through enlarging the European Stability Mechanism (ESM) or running the existing European Financial Stability Facility alongside the ESM.
According to the report, the key risk remains that policies do not shift Europe toward a "good equilibrium" and fail to break adverse feedback loops between real, fiscal, and financial sectors. This risk must be urgently addressed, it said.
The IMF urged the ECB to make monetary policy highly accommodative, by lowering the target policy rate, for which room exists, and through further unconventional measures. The Fund said the ECB should "continue to provide liquidity and stay fully engaged in securities purchases to help improve the prospects for financial stability."
The Fund expects the Federal Reserve, Bank of England, and Bank of Japan to stand ready to expand unconventional support, if downside risks materialize.
The IMF noted that there is an urgent need to set out a credible path for fiscal consolidation in advanced economies, over the medium term. Meanwhile, emerging economies should give priority to ensure a soft landing as domestic growth slows amid a deteriorating external environment and volatile capital flows, the report said.