IMF calls on European Central Bank to keep interest rates high

The report states that Europe faces a daunting task in restoring long-term price stability following its struggle with the challenges of COVID-19 and the energy crisis triggered by the Russia-Ukraine war.

Noting that global shifts and climate change are contributing to long-standing growth problems, the report records that the slowdown in inflation has provided some relief to households and firms.

The report emphasizes that while the reduction in issues such as commodity prices and supply constraints has been effective in slowing inflation, combating persistent core inflation is more difficult.

"Central banks in Europe have tightened monetary policy significantly. Governments are also reducing fiscal support," the report states, adding, "The lasting effects of last year's energy price shocks and tighter policies are contributing to a slowdown in growth this year."

The report points out that European countries with larger manufacturing and energy-intensive sectors are slowing down more than those dependent on services and tourism, stating, "Europe's outlook is for a soft landing, with inflation gradually falling. Growth across the region is expected to slow from 2.7 percent last year to 1.3 percent in 2023, and rise to 1.5 percent in 2024."

"APPROACHING THE END OF THE MONETARY POLICY TIGHTENING CYCLE"

The report notes that service-oriented economies in Europe will recover faster than countries with large manufacturing sectors that face low external demand and are more exposed to high energy prices, and reports that market economies in Europe will experience a slight recovery in 2024, though this improvement will vary from country to country.

Stating that "the monetary policy tightening cycle is nearing its end," the report projects that fiscal consolidation will accelerate in 2024.

The report assesses that "while a strong US economy is an important pillar of global demand, weak activity in China, new commodity price shocks, and the realization of financial stability risks are significant downside risks to growth."

Noting that tighter monetary policy has increased borrowing costs and weakened the real estate balance sheets of households and companies, the report states that although bank capital buffers are healthy for now, banks could face difficulties in an adverse scenario.

The report records that inflation is expected to decline gradually, and while weak domestic demand and falling commodity prices in 2023 will be reflected in core inflation, the projected recovery in real incomes will slow the pace of the decline in inflation.

"EUROPE'S MEDIUM-TERM GROWTH PROSPECTS HAVE BEEN DECLINING FOR SOME TIME"

Pointing out that most European countries are not expected to reach their inflation targets before 2025, the report emphasizes that nominal wage growth poses a risk to falling inflation.

The report states, "Europe's medium-term growth prospects have been declining for some time. Weak productivity growth is an important factor in this. New challenges arising from higher and more volatile energy costs and changes in supply and trade relations are disrupting production structures."

Stating that European countries with high debt, in particular, need to reduce public debt, the report emphasizes that maintaining a restrictive monetary policy stance is of great importance to ensure that inflation returns to target within a reasonable period.

The report notes that there is significant uncertainty regarding the persistence of inflation, that the ECB will have to maintain high policy rates for some time, and that the cost of easing too early could be very high.

News Source: 12punto