Dramatic central bank action worked, but beware the exit -IMF

WASHINGTON Thu May 16, 2013 11:09am EDT

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WASHINGTON May 16 (Reuters) - Central banks got it right when they saved the world economy, but their unprecedented actions risk disruptive cross-border spillovers and potentially heavy losses when the time comes to exit, the IMF said on Thursday.

In the most detailed survey so far of the dramatic measures undertaken to counter the 2007-2009 global financial crisis, the International Monetary Fund broadly repeated earlier assessments that the steps had worked, but face diminishing returns.

However, in new work undertaken to answer a question that remains controversial in many countries, including the United States where the Federal Reserve was in the eye of the storm, it also outlined scenarios where losses on exit could be severe.

But it reserved its toughest language for politicians who fail to make use of the breathing space won by ultra-easy policy after interest rates were slashed in nations including the United States, Japan and Britain and in the euro zone.

"A key concern is that monetary policy is called on to do too much, and that the breathing space it offers is not used to engage in needed fiscal, structural, and financial sector reforms," the IMF said in the report.

"These reforms are essential to ensuring macroeconomic stability and entrenching the recovery, eventually allowing for the unwinding of unconventional monetary policies," it said.

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