IMF chief Christine Lagarde on Thursday defended central bank rate hikes in a veiled rebuke to Donald Trump after the US president blamed “crazy” Fed policies for contributing to financial market turmoil.
Lagarde spoke as a global market sell-off rolled into Asia following Trump’s comments, underscoring the rising financial volatility that the IMF will address at its annual meetings with the World Bank this week in Bali.
Lagarde, 62, said central bank rate increases such as those by the policy-setting US Federal Reserve were justified by fundamentals — as several central bankers pointed to their need for independence.
“It is clearly a necessary development for those economies that are showing much improved growth, inflation that is picking up… unemployment that is extremely low,” Lagarde told a press briefing in Bali.
“It’s inevitable that central banks make the decisions that they make.”
Following a sharp Wall Street sell-off on Wednesday, Trump said the Federal Reserve “is making a mistake.”
“I think the Fed has gone crazy,” he said.
Trump has repeatedly touted Wall Street record highs as proof of the success of his policies and confrontational trade strategy, and frequently criticises the Fed for gradually raising interest rates, which could squeeze the brakes on equity markets.
“Regulators need to be given the space to act independently, without continuous political interference,” South African Reserve Bank Governor Lesetja Kganyago told a panel in response to questions about Trump’s comments.
Bank of England Governor Mark Carney added: “I think the sanest way to answer that question is to associate myself entirely with Lesetja’s answer.”
The world’s financial elite are on the Indonesian holiday island for a week of talks clouded by the economic outlook.
An IMF report released Wednesday said global growth could be at risk if emerging markets deteriorate further or trade tensions escalate.
Much of the global angst has been dominated by Trump’s escalating tariff war with China and his disdain for world trading norms.
But higher US interest rates have also helped send emerging market currencies into a tailspin, as countries that borrowed heavily in dollars race to pay back debt.
Lagarde said in Bali that world leaders should fix global trading systems instead of tearing them down, in response to rising nationalist and protectionist impulses.
While defending rate hikes, Lagarde added Thursday that uncoordinated increases in advanced economies were contributing to destabilising capital outflows from emerging markets.
Combined with trade tensions, this had created “a bit of an unprecedented situation” for the world economy, she said.
“Clearly as a result of (rate hikes)… we see and we will continue to see capital flow movements,” she added.
“The fact that large central banks of advanced economies are not exactly all moving at the same pace is also probably accelerating that phenomenon.”
Trump has levied or threatened tariffs on goods from economies around the world, notably China, but also on traditional allies such as the European Union.
The head of the World Trade Organization warned that a “full-blown commercial war” could shrink global trade by nearly 18 percent and also knock worldwide GDP, hurting the United States, China, and others.
The IMF on Tuesday cut its global GDP growth forecast by 0.2 percentage points to 3.7 percent for both 2018 and 2019, citing the economic uncertainties.
Lagarde warned the world against falling into “collective amnesia” about what lead to the 2008 global financial crisis, saying it was a time when protectionism and geopolitical tensions led to “terrible events”.
The IMF chief met with Pakistani officials later Thursday and said afterwards that a team would visit Islamabad for talks on a possible bailout of its shaky economy.
Pakistan faces a looming balance-of-payments crisis, with Prime Minister Imran Khan saying this week that his country needed $10-12 billion.
“During the meeting, they requested financial assistance from the IMF to help address Pakistan’s economic challenges,” Lagarde said in a statement.
The Bali meetings opened in the wake of an earthquake and tsunami on September 28 on Sulawesi island that left more than 2,000 dead and possibly thousands more missing, spotlighting disaster-prone Indonesia’s safety hazards.
Those risks were highlighted again early Thursday, when a 6.0-magnitude quake rattled parts of the islands of Java and Bali, including meeting venues and hotels.
Three people were killed on Java when buildings collapsed.
No damage or casualties were reported on Bali, but the tremor prompted summit organisers to issue guidance to attendees on what to do if a quake strikes.
— Bloomberg News contributed to this report –