IMF’s Lagarde warns on deflation in ‘feeble’ world economic recovery

International Monetary Fund managing director Christine Lagarde urged policy makers in advanced economies to fight threats of deflation that would threaten a global recovery she called "feeble". Less than a week before the Washington-based fund releases its new global growth forecasts, Ms Lagarde said momentum seen in the second half of last year should strengthen in 2014 as developed economies gain pace. Still, global economic expansion is below its potential of about 4 per cent, she said.

“The world could create more jobs before we would need to worry about the global inflation genie coming out of its bottle,” Ms Lagarde said in a speech at the National Press Club in Washington today. “With inflation running below many central banks’ targets, we see rising risks of deflation, which could prove disastrous for the recovery.

“If inflation is the genie, then deflation is the ogre that must be fought decisively,” she said.

She recommended that central banks in the most developed economies wait until “robust growth is firmly rooted” before ending unconventional monetary policies.

In the US “it will be critical to avoid premature withdrawal of monetary support and to return to an orderly budget process, including by promptly removing the debt ceiling threat,” she said. In the euro area, monetary policy could also do more, including with more targeted lending, she said.

-Bloomberg