IMF urges further ECB interest rate cut

The ECB should consider a further interest rate cut and more unconventional measures to boost eurozone growth, according to the IMF.

In its latest World Economic Outlook, the IMF noted there was an improvement in competitiveness and exports among eurozone periphery countries, but very weak domestic demand.

“In the [eurozone] core countries, there is also a loss of confidence in the future which, if it doesn’t come around, then it could become a self fulfilling prophecy and that is worrying,” said IMF chief economist, Olivier Blanchard.

The IMF downgraded its forecast for world growth from its last assessment in April, cutting this year’s forecast from 3.3% to 3.1% and next year’s from 4% to 3.8%.

The main risks to global growth are ongoing developments in the eurozone, said the IMF. In its Article IV review of the eurozone, released on Monday, it noted growth across the region remains very weak and unemployment has hit record levels.

Moreover, the banking system is fragmented and the credit transmission mechanism is broken. The IMF urged eurozone leaders to conduct a stress test of the banking system as soon as possible in order to identify what capital shortfall exists.

If a bank needs capital, then it must be directly recapitalised by the ESM, said the IMF. A full banking union, combined with strategies to promote growth, including the implementation of the Services Directive, are also needed, added the Washington-based institution.

Other risks to global growth include the slowdown in China, ‘Abeconomics’ in Japan, and the US exit from quantitative easing.

The Chinese government is trying to rebalance the economy away from investment towards domestic consumption. There will be in a tail-off in economic activity as consumer demand catches up with previously high levels of investment. However, the IMF noted that the Chinese government was aware of this problem and was maintaining robust credit flows.

Japan and the US have embarked on unprecedented levels of quantitative easing. Both countries must now show that they have medium-term fiscal plans that can accommodate this quantitative easing.

Moreover, the US must communicate to the market effectively when it plans to start tapering its asset buying programme.

The world economy is set for a three-speed recovery. Emerging markets are set to outperform the US, which in turn is set to outperform the EU.