Brussels: Strong euro-area consumer-price growth calls for more European Central Bank interest-rate hikes and a sustained “tightening bias,” according to the International Monetary Fund.
“The inflation outlook and the high uncertainty regarding inflation persistence suggest that a more restrictive stance than at present, maintained over a sustained period, will be needed to keep inflation expectations anchored and return inflation to target in a timely manner,” the IMF said Friday, a day after policymakers in Frankfurt raised borrowing costs for an eighth consecutive time and signaled another move in July.
Inflation in the region has cooled from a 10.6 per cent peak in October, but it’s still more than three times the ECB’s 2 per cent goal. Tight financial conditions - triggered by an unprecedented hiking cycle of 400 basis-points since July - and an easing of supply constraints mean the rate will continue to slow and a “convergence to target is projected around mid-2025,” the Washington-based fund said.
Yet it highlighted that core inflation, which strips out volatile elements like energy and food, “has proven more persistent and has begun to decline only recently.”
In its concluding statement after a so-called Article IV consultation, the IMF also praised the euro-zone economy’s “remarkable resilience in the aftermath of Russia’s attack on Ukraine and the largest terms of trade shock in several decades.” Still, growth will pick up only “modestly” this year and next, while medium-term output “is likely to remain below pre-war trend for an extended period given the costs of adjusting to persistently higher energy prices.”
The IMF also urged countries in the region to rein in public spending and for the bloc to swiftly come to an agreement on the EU economic and fiscal governance reform.
Finally, it warned that the “relaxation of state-aid rules” - allowing EU members to grant subsidies or tax incentives to match what’s being offered elsewhere - “could potentially lead to high fiscal costs as well as economic inefficiencies and distortions.”