Lagarde Says Policy Makers Should ‘Act Boldly’ to Support Global Recovery

International Monetary Fund Managing Director Christine Lagarde said governments and policy makers in developed economies must take action to support the recovery as the risk of recession outweighs the threat from inflation.

“Countries must act now and act boldly to steer their economies through this dangerous new phase of the recovery,” Lagarde said in a speech at the Chatham House foreign-affairs research group in London today. Monetary policy in advanced economies “should remain highly accommodative,” she said.

Central bankers and finance ministers from the Group of Seven nations convene in Marseille, France, today as they face calls to boost growth amid growing threats from Europe’s debt crisis and a slowing global recovery. G-7 members are fighting on multiple fronts to prevent the slowdown from turning into a slump, with many benchmark interest rates at or near record lows and government debt levels at unprecedented highs.

While “policy makers do still have options to support the recovery,” the scope for action “is considerably narrower than when the crisis first erupted,” Lagarde said. “Policy makers should stand ready, as needed, to take more action to support the recovery -- including through unconventional measures.”

Growth Concerns

The Organization for Economic Cooperation and Development slashed its growth forecasts for the U.S. and Japan yesterday and said central banks around the world should be ready to ease monetary policy if economies weaken further. Underscoring growth concerns, the European Central Bank and Bank of England held their key interest rates the same day, and Federal Reserve Chairman Ben S. Bernanke said U.S. policy makers will discuss tools they could use to boost the recovery this month.

“Downside risks have increased” and “the global rebalancing of demand needed for sustainable global growth has stalled,” Lagarde said. “Weak growth and weak balance sheets of governments, financial institutions and households are feeding negatively on each other. If growth continues to lose momentum, balance-sheet problems will worsen, fiscal sustainability will be threatened, and the scope for policies to salvage the recovery will disappear.”

A measure of banks’ reluctance to lend to each other in Europe this week rose to the highest in almost 2 1/2 years and about $5 trillion has been wiped off global equity markets since the start of July as debt fears rippled around the world.

‘Liquidity Crisis’

“We must not underestimate the risks of a further spread of economic weakness or even a debilitating liquidity crisis,” Lagarde said. “That is why action is needed urgently so banks can return to the business of financing economic activity.”

The IMF head said U.S. President Barack Obama’s proposed $447 billion employment plan announced yesterday was “welcome” as it will “focus on supporting growth and job creation in the short term.” Still, “it remains critical for the U.S. to clarify its medium-term plan to put public debt on a more sustainable path.”

Lagarde said many of the countries that share the euro “need more fiscal action and more clarity about the availability of sovereign financing.” It is “essential” that euro-region leaders implement an agreement reached on July 21 to try to resolve their sovereign-debt crisis “as soon as possible,” she said.

While “strong fiscal consolidation is essential” to restoring sustainability in the U.K. government’s finances and the policy stance is “appropriate,” the Bank of England has “room for additional easing if the outlook does not improve soon,” the IMF head said.

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