Central bank stimulus under the spotlight at IMF, G20

MEXICO CITY/WASHINGTON Wed Apr 17, 2013 1:07am EDT

A man walks past the Bank of Japan building in Tokyo March 17, 2010. REUTERS/Toru Hanai

A man walks past the Bank of Japan building in Tokyo March 17, 2010.

Credit: Reuters/Toru Hanai

MEXICO CITY/WASHINGTON (Reuters) - Global policymakers will discuss the impact of unprecedented monetary policy easing at meetings in Washington this week along with the softly-softly approach central banks will need to eventually wean the world off super-cheap funds.

The Bank of Japan has joined other major central banks in aggressive policy stimulus, pledging to inject $1.4 trillion over the next two years and fanning tensions over currency wars.

Officials preparing for Group of 20 talks on the sidelines of World Bank and International Monetary Fund meetings said Japan's stimulus would dominate discussions on the world economy, especially the repercussions on asset prices and risks of stoking speculative buying.

"Everyone is interested in a strong Japanese economy, but the repercussions of these measures and their viability need to be explored," one G20 official said on condition of anonymity.

The G20 finance ministers and central bankers would probably confirm a February pledge to avoid competitive currency devaluations, officials said. The yen hit multi-year lows against the euro and dollar after the BOJ move.

"Overall the view is that Japanese initiatives focused on the country's domestic problems go in the right direction," a euro-zone official said. "But there will be a debate on the consequences outside of Japan, including on foreign exchange rates."

The G20 will also spar over debt reduction goals, with the United States against setting targets while others back a proposal to cut public debt over the longer term to below 90 percent of gross domestic product.

A debt-cutting pact struck in Toronto in 2010 will expire this year if leaders fail to agree to extend it at a September summit of leaders. Delegates at Thursday and Friday's talks hope to at least move toward a proposal for the leaders.

Some members of the G20 - which groups major developing nations and advanced economies - worry that strict targets may derail the still-fragile economic recovery, and others fret that loose fiscal policy may pave the way for future crises.

"The goal is and remains sustainable debt levels," a German official said. "Some believe you get this with consolidation, others say growth. We say growth-friendly consolidation."

EXIT, EVENTUALLY

The IMF has trimmed forecasts for global growth given sharp spending cuts in the United States and Europe's continuing debt crisis, in which Cyprus became the latest country to need a bailout.

Although the global lender thinks it is appropriate for advanced nations to keep up monetary stimulus for now, it is also urging policymakers to start thinking about the consequences of ending ultra-easy policies.

Emerging markets are pushing for the IMF to look into the impact of years of stimulus, after major central banks not only cut official interest rates to 1 percent or less but also pumped extra money into their banking systems and economies.

The U.S. Federal Reserve, which has already expanded its balance sheet by more than $2 trillion, is buying $85 billion a month in bonds; the European Central Bank has lent banks more than 3 trillion euros ($3.94 trillion) in long-term loans and the Bank of England has bought 375 billion pounds ($573.43 billion) of bonds, even before the BOJ's $1.4 trillion effort.

"Interest rates are now at very low levels and ... we can see that there is a risk," said Russian Finance Minister Anton Siluanov, whose country holds the rotating G20 chair.

"In case of raising interest rates, the rising cost of debt will lead to yet another wave of debt problems, as the cost of servicing sovereign debt will increase."

Although major economies are still far from unwinding bond-buying or raising rates, emerging economies in particular are eyeing market expectations for the timing of an exit as these will have an impact on long-term market rates.

The Institute of International Finance calculates that emerging markets have received net foreign capital inflows of $3.3 trillion in the last three years, a wall of money that has pushed up currencies and prompted some to slap on capital controls. But a reverse could be just as painful.

Investors might dump bonds as central banks begin to reverse their quantitative easing, leading to a jump in long-term rates that could disrupt flows to emerging markets, cause losses at banks and increase credit risks, the IMF has warned.

Officials said the hot-button issue of IMF reform would be discussed but negotiations on increasing emerging markets' say in the fund had effectively stalled.

(Additional reporting by G20 bureaux; Editing by Lisa Shumaker)

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
Comments (6)
Nojer wrote:
Why do they use the term “stimulus”? If public spending stimulates the economy then there must be at least one example in the economic record that shows that the private sector grew as public spending increased. The UK had “Keynesian” governments throughout the sixties and seventies so there must be examples of increasing spending causing increased growth.

Did you know that there is no example in the past 60 years of increased public spending resulting in increased private sector growth? No, none. Surely the IMF must know about Sydenham’s Law of public expenditure and economic growth.

Apr 17, 2013 9:49am EDT  --  Report as abuse
gee.la wrote:
The more money is printed out, the faster the bubble bursts and the faster the deflation will come. The dilemma has formed and the situation is becoming more tricky to handle. The commodities cycle is hard to change, but they still want to change its phase and will be punished hard. The serious outcome will destroy all attempts and take their power to assault the nations in a great scale. It is impossible to stop. With the bubble bursting, the commodities nations will be pushed into a dire situation and it will push the wave higher and more out of control. In brief, the more intervention, the worse the situation, but this will not stop them to intervene more, instead, they will keep intervene a lot more so as to make it doomed. So it has been already doomed.

Apr 17, 2013 10:14am EDT  --  Report as abuse
Lemming wrote:
The modern-day New World Order agenda is not hidden. It has been detailed in documents from the Council of Foreign Relations, Trilateral Commission, Bilderberg Group, Club of Rome, United Nations, World Bank, and the International Monetary Fund. (Just a thought) (author unknown)

Apr 17, 2013 11:30am EDT  --  Report as abuse
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.