ENP Newswire -
Release date- 28072014 - The
Strong growth is fueling rapid job creation, and inflation is expected to remain low, according to the IMF's assessment.
So we are much more optimistic now than we were a year ago about both the current pace of the recovery and about prospects for future growth, although of course there are always risks on the horizon.
Although the overall outlook is positive, some key domestic and external risks remain. Domestic risks include uncertainty about future productivity growth and the potential for financial risks stemming from the housing market. External risks include the unwinding of unconventional monetary policies in the U.S., weaker-than-anticipated growth in emerging and advanced economies, and increased geopolitical tensions.
Gerson: Housing prices have been growing very rapidly in
The authorities have taken a number of steps to try to contain financial risks associated with rapid house price growth. For example, they are introducing limits on the share of new mortgages banks can grant that feature very high ratios of loan amounts to borrower incomes. Banks are also being required to run more strenuous tests of loan affordability. We agree that these types of 'macroprudential measures' to address systemic financial risks are the appropriate first line of defense, and that early action like this is warranted, especially as it may take time for these measures to have an impact. The effects of these measures will need to be monitored carefully, and settings may need to be modified over time to maximize their benefits.
At the same time, the fundamental factor driving housing price growth is inadequate supply of housing, and political consensus to fix this is essential. Recent reforms to the planning system are helping, but more needs to be done to lift unnecessary constraints on development, to ensure that the tax system encourages the most efficient use of land, and to further develop markets for rental housing.
Gerson: Monetary policy should stay accommodative for now. Inflation is low and stable, wage growth has been slow, and although output growth has picked up, the recovery remains at an early stage and there is still slack in the economy. Until we see signs that inflation is rising, or that costs are running ahead of productivity growth, monetary policy should continue to support the recovery.
An accommodative monetary policy can also help offset some of the impact from further fiscal consolidation. The
So overall the policy mix being followed by the authorities looks appropriate, with an accommodative monetary policy that is providing support to the recovery and fiscal consolidation that aims to bring down deficits and put the debt ratio on a downward path.
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