WASHINGTON (Reuters) – The International Monetary Fund on Thursday warned central banks to be vigilant against a sudden spike in interest rates that could spill over into emerging markets, even as a $1.9 trillion U.S. stimulus package benefits most countries and aids recovery.
IMF spokesman Gerry Rice told a regular news briefing that the Fund’s preliminary forecasts show the American Rescue Plan Act passed on Wednesday would boost U.S. GDP output by 5% to 6% over three years, but more analysis is needed to reach a final estimate. But exceptionally low dollar funding costs mean there is a risk of a sudden tightening of financial conditions, and this “should be carefully managed,” Rice added.
“For the Federal Reserve and other central banks in advanced economies, this means continuing to communicate clearly, as they have been doing about their assessment of the economy, and their evolving views on asset purchases and interest rate policy to avoid any unwarranted tightening of financial market conditions,” Rice said.
His comments come amid concerns in financial markets that rising bond yields could slow recovery. The European Central Bank said on Thursday it would accelerate bond purchases to stop any unwarranted rise in debt financing costs.
Fed officials also have signaled they do not plan to change super-easy monetary policy for some time, expressing little concern over a rapid rise in U.S. Treasury yields in recent weeks..
Rice said emerging market and developing economies, especially those with financial vulnerabilities and weak trade ties to the United States, should be ready with contingent policies.
“So, bottom line on the impact is we see potentially significant positive spillovers in terms of global growth” from the U.S. stimulus. “But as always, keeping a watchful eye at the same time, on potential risks.”
The IMF will update its global economic forecasts in its World Economic Outlook at the time of the April 5-11 IMF and World Bank Spring Meetings to be held virtually.
IMF member countries at the Spring Meetings will discuss plans for a general allocation of IMF Special Drawing Rights that would provide them with newly created reserves to aid recovery, Rice said, but said the size of the potential allocation has not been determined.
IMF Managing Director Kristalina Georgieva last week alluded to a $500 billion potential SDR allocation, the same size that G20 chair Italy has advocated.
Rice said IMF staff are working on a proposal to the G20 on the SDR allocation, and it will need to be first approved by the IMF’s executive board with an 85% majority of the Fund’s voting power. He declined to say when the proposal would be ready for consideration.
(Reporting by David Lawder in Washington; Editing by Chizu Nomiyama and Matthew Lewis)
