China reforms and US interest rate hike are ‘necessary and healthy’: IMF’s Lagarde

The head of the International Monetary Fund (IMF) has said changes in Chinese policy and the looming US interest rate hike are “necessary and healthy”. China has launched deep structural reforms to lift incomes and living standards while the Federal Reserve is expected to rate rates this year.

IMF chief Christine Lagarde said these shifts are “good for China, good for the United States, and good for the world”.

“The challenge is to manage them as efficiently and as smoothly as possible,” she said in a speech in Washington posted on the body’s website on Wednesday.

China is refocusing its reforms to consumption and services, away from commodity-intensive investment and manufacturing.

Lagarde said that China’s new policy will contribute to a prolonged period of low commodity prices, and the change will need to be managed by policymakers.

She said the Fed also faces a delicate balancing act of normalising interest rates while minimising the risk of financial market disruption.

“The prospect of rising US rates has already contributed to higher financing costs for some borrowers, including emerging and developing economies,” Lagarde said.

“This is part of a necessary adjustment in global financial conditions. The process, however, could be complicated by structural changes in fixed-income markets, which have become less liquid and more fragile – a recipe for market overreactions and disruptions.” Her remarks come ahead of the IMF’s World Economic Outlook next week, which Lagarde expects to show weaker global growth this year than last, followed by a “modest acceleration” in 2016.

Source: ShareCast News