The probability of a sharp global slowdown has eased due to recent policy measures adopted in the euro zone to tackle its debt crisis, the International Monetary Fund said on Thursday, but it warned risks to world growth remain squarely to the downside.
In a report to G20 finance ministers in Mexico over the weekend and only published on Thursday, the IMF said the euro zone should act decisively on multiple fronts to successfully resolve its sovereign debt crisis.
The key risk remains that policies do not shift Europe toward a 'good equilibrium' and fail to break adverse feedback loops between real, fiscal, and financial sectors, the IMF said, urging euro zone policymakers to increase a firewall by about $500 billion to protect countries from financial contagion.
The IMF said the European Central Bank should continue injecting liquidity and stay fully engaged in securities purchases to help shore up financial stability.
Meanwhile, ECB monetary policy should focus on ensuring price stability, it said, adding that there was room to lower the target policy rate if needed.
In the United States, Britain and Japan, central banks should stand ready to expand unconventional measures if the outlook worsens, the IMF said.
In emerging markets, the IMF said growth had slowed more than expected, although risk perceptions had eased and capital flows had resumed into emerging Asia, Latin America and South Africa economies since the beginning of 2012.
In emerging countries with high inflation and public debt, including India and some economies in the Middle East, a cautious stance to policy easing was needed, the IMF said.
The IMF said higher oil prices were a risk to global growth and repeated an earlier warning that the impact of an oil supply shock in the Middle East could be large if supplies were not increased elsewhere.
In particular, a halt in Iran's oil exports could trigger an initial price increase of about 20 percent to 30 percent, the IMF warned.
Saudi Arabia assured G20 finance ministers over the weekend it was prepared to release more oil if necessary to make up for supply disruptions, IMF Managing Director Christine Lagarde told a news conference on Sunday.
(Reporting By Lesley Wroughton; editing by Chizu Nomiyama and Jeffrey Benkoe)