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By Anna Yukhananov
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WASHINGTON (Reuters) – The International Monetary Fund expects global growth to pick up this year, though deflation is a “rising risk” as long as economic growth stays below what policy-makers believe is optimal, the head of the Fund said on Wednesday.
IMF Managing Director Christine Lagarde expressed concern about price growth remaining below the target of many central banks, which could hurt the nascent recovery.
“If inflation is the genie, then deflation is the ogre that must be fought decisively,” Lagarde said at the National Press Club in Washington.
An inflation rate that is well below the 2 percent targeted by some of the world’s major central banks carries risks in the longer term because it can deflate wages and demand, depressing the economy.
In the United States, Federal Reserve officials are stumped about why inflation has stayed so low for so long, and some worry it could be a sign the U.S. recovery is not as strong as some other economic data might indicate. In theory, inflation should rise as the job market heals.
However, disappointing data on U.S. nonfarm payrolls last week offered a cautionary note after a string of data – from consumer spending and trade to industrial production – had suggested the U.S. economy ended 2013 on strong footing and was positioned to strengthen further this year.
While December’s unemployment rate fell 0.3 percentage point to 6.7 percent, its lowest level since October 2008, the decline mostly reflected people leaving the labour force.
Lagarde said central banks should be careful to withdraw monetary stimulus only once the economy is clearly on a firm footing.
The Fed last month decided to trim its monthly bond purchases to $75 billion from $85 billion, and two of the U.S. central bank’s most hawkish policymakers said this week that it should bring its bond-buying program to a swift close.
Lagarde said the so-called “taper” of the Fed’s bond buying was not expected to roil markets as long as it was gradual.
“We don’t anticipate massive, heavy and serious consequences,” she said.
However, she said more rapid adjustments could cause sharp market gyrations and volatile capital flows, which would hit some emerging markets in particular.
Developing economies, which had been the engine of the global recovery after the 2008 financial crisis, are now slowing due to cyclical factors, Lagarde said.
“Overall, the direction is positive, but global growth is still too low, too fragile, and too uneven,” she said.
Reporting by Anna Yukhananov; Editing by Paul Simao and Chizu Nomiyama
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