IMF warns cen­tral banks could lose fight with de­fla­tion

The Myanmar Times - - Business -

THE In­ter­na­tional Mon­e­tary Fund has warned that cen­tral banks are strug­gling to beat back de­fla­tion­ary forces and that gov­ern­ments need to spend to help them suc­ceed.

In a new as­sess­ment of global eco­nomic con­di­tions, the IMF said many coun­tries world­wide are bat­tling dis­in­fla­tion – low and slow­ing in­fla­tion – due to weak global eco­nomic growth.

If cen­tral banks around the world can­not halt this stall, and if com­pa­nies and peo­ple in­creas­ingly be­lieve they can’t halt it, their economies risk sink­ing into a de­fla­tion­ary spi­ral – where prices gen­er­ally start to fall and com­pa­nies and con­sumers hold back spend­ing and in­vest­ment, stalling the econ­omy.

In this case, “coun­tries can’t af­ford to be com­pla­cent”, the Fund warned.

The re­port said de­fla­tion­ary pres­sures in many coun­tries are com­ing from abroad in the form of sink­ing prices of both com­modi­ties and man­u­fac­tured goods.

“The breadth of the de­cline in in­fla­tion across coun­tries and the fact that it is stronger in the trad­able goods sec­tors un­der­score the global na­ture of dis­in­fla­tion­ary forces,” the IMF said.

Weak in­fla­tion chal­lenges cen­tral banks’ abil­ity to use mon­e­tary pol­icy to stim­u­late de­mand, the IMF notes, be­cause in­ter­est rates are likely to al­ready be very low, giv­ing them lit­tle room to cut fur­ther.

That has been the case with top cen­tral banks in­clud­ing the Fed­eral Re­serve, the Euro­pean Cen­tral Bank and the Bank of Ja­pan, with the lat­ter two al­ready hav­ing taken some in­ter­est rates neg­a­tive.

“Even­tu­ally, ‘per­sis­tent’ dis­in­fla­tion can lead to costly de­fla­tion­ary cy­cles – as we have seen in Ja­pan – where weak de­mand and de­fla­tion re­in­force each other, and end up in­creas­ing debt bur­dens and hin­der­ing eco­nomic ac­tiv­ity and job cre­ation,” the IMF said.

Part of the prob­lem is about per­cep­tions: if peo­ple ex­pect that in­fla­tion is go­ing to slow what­ever the cen­tral banks do, it fur­ther un­der­mines the ef­fec­tive­ness of mon­e­tary pol­icy.

The IMF said there are some signs of that prob­lem: Cen­tral banks in ad­vanced coun­tries are now “in­creas­ingly per­ceived” to lack much pol­icy scope to re­verse dis­in­fla­tion.

“Af­ter a long pe­riod of sta­bil­ity, cer­tain mea­sures of medium-term in­fla­tion ex­pec­ta­tions have in­deed fallen in some ad­vanced economies.”

Ad­di­tion­ally, “in­fla­tion shocks” – such as Bri­tain’s vote to leave the eu­ro­zone, which could slow growth and in­vest­ment – can add to down­ward pres­sure that cen­tral banks can­not halt.

The IMF called that “a rea­son for con­cern if the un­der­shoot­ing of in­fla­tion tar­gets per­sists”.

Still op­ti­mistic, the IMF re­port said the “most likely out­come” of cen­tral bank poli­cies is a grad­ual uptick in in­fla­tion.

It called on gov­ern­ments to use spend­ing, re­forms and in­come poli­cies to boost de­mand and strengthen in­fla­tion ex­pec­ta­tions.

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