IMF chief says global economy in holding pattern

International Monetary Fund (IMF) Managing Director Dominique Strauss-Kahn delivers a speech about global economy and IMF reform at Tsinghua University in Beijing November 16, 2009.

LONDON (Reuters) - The global economy is in a holding pattern and vulnerable to more upheaval, and a lasting recovery will depend on policymakers taking the proper steps in coming months, the head of the IMF said on Monday.

Rich countries' top priority should be planning to clean up the fiscal mess left by emergency support measures although it was still too early to remove them, International Monetary Fund Managing Director Dominique Strauss-Kahn said.

"Exiting too soon would be terrible. It may mean the double-dip -- which is not our central scenario -- may happen. So we have to wait until we have a real recovery in private demand," he said in remarks to the Confederation of British Industry's annual conference.

Governments have committed trillions of dollars in stimulus and guarantees and central banks have cut interest rates to record lows since the financial crisis intensified after the collapse of Lehman Brothers (LEHMQ.PK) in September 2008.

Those efforts helped to stem the crisis, Strauss-Kahn said.

He cautioned that the sense of global policy unity forged during the darkest days of the financial crisis might dissolve, and urged close cooperation even though exit strategies differ from country to country.

For advanced economies, where debt burdens have grown sharply over the past year, the IMF wants governments to plan to get their respective finances back in order.

That means ensuring stimulus measures are temporary and putting entitlement programs on a sustainable path. Eventually, more drastic measures will be necessary, Strauss-Kahn said, including spending cuts and -- in some cases -- tax hikes.

"I see fewer problems with monetary policy," he said, adding that central banks had the proper tools to unwind the trillions of dollars worth of emergency lending programs they cobbled together in the midst of the financial panic.

"Especially in many advanced economies, monetary policy can afford to stay accommodative for some time, given little sign of inflation on the horizon," he said.

EMERGING MARKET RISKS

Some emerging economies might need to move sooner, he said.

Since emerging economies recovered more quickly from the recession than industrialized economies did, capital flows have swelled, posing a threat to stability in some markets.

In separate remarks to French newspaper Le Monde, the IMF's chief economist Olivier Blanchard said some emerging markets were at risk of "capital movements, accumulation of reserves and bubbles which would be difficult to control."

Strauss-Kahn said capital controls could be part of a package of measures that countries used to limit inflows, but cautioned that "all tools have their limitations."

He said China and other emerging Asian surplus countries were leading candidates to replace U.S. consumers as the main engine of world growth.

Still, he said they had "some way to go," and urged China to allow its yuan currency to appreciate more rapidly.

"By reducing global imbalances, the world will be a safer place, less prone to crises," he said. "It will also be in China's long-term interest."

On financial reform, he said it was essential to put tougher rules in place to avoid a repeat of the crisis, but policymakers must take care not to clamp down too hard or too quickly because that could derail the recovery.

He suggested laying out future requirements and the timetable for implementation to reduce regulatory uncertainty, which might be inadvertently encouraging more risk-taking.

(Reporting by Emily Kaiser in Washington, Fiona Shaikh in London and Anna Willard in Paris, Editing by )