Cheap Money: IMF Warns Central Banks of Excessive Monetary Easing

Written by | Monday, January 27th, 2020

Central banks “served the world well” through their monetary stimulus, which has been one of the main engines of growth over the past years, but continuing with the supply of ‘cheap money’ could hurt low-income countries, fuel risky investments and affect savers, the International Monetary Fund (IMF) warned during the World Economic Forum in Davos, Switzerland, on Friday (24 January). With the economy suffering from “sluggish” growth, Kristalina Georgieva, the IMF’s Managing Director, warned that one of the main risks is low interest rates, together with low growth, low productivity growth and low inflation. According to the IMF’s analysis, 71 rate cuts by 49 central banks added 0.5% to global growth.
Georgieva pointed her finger at “the low for longer” interest rates, “especially when they tilt to negative interest rates”, stressing that “when people talked about low (rates) forever, (it) sent a chill down my spine”. The Fund estimates there is around $188 trillion in debt across the world and it is mainly low-income countries that were a source of concern. Another “big concern”, Georgieva stressed, is when central banks enter into negative interest rates territory, as it is the case of the ECB, “it is a big drag on the savers and on the banks”. Also the IMF’s chief economist Gita Gopinath warned that this excess of liquidity effectively forces institutional investors, such as pension funds or insurers, to opt for risky investments given the low returns.
In recent months, Germany, the Netherlands and some other Eurozone countries have also questioned the ECB’s monetary easing. Their central bankers have also criticized ECB’s latest round of monetary stimulus led by Lagarde’s predecessor Mario Draghi. Georgieva made the remarks alongside the ECB President, Christine Lagarde. The panel also included the governor of the central bank of Japan, Haruhiko Kuroda, German finance minister, Olaf Scholz, and US Treasury Secretary, Steve Mnuchin. Currently, the ECB’s inflation target to ensure price increases are below but close to 2%.

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