Keep interest rates low despite energy price hikes, IMF urges  

Kristalina Georgieva's comments chime with those of the ECB's Christine Lagarde amid the upbeat mood in the eurozone
Keep interest rates low despite energy price hikes, IMF urges  

IMF managing director Kristalina Georgieva said she saw the possibility of a 'modest downward revision' to economic forecasts for the eurozone.

The ECB should stick with its ultra-supportive stance as long as the current bout of surging consumer prices appears to be temporary, the IMF said.

“With underlying inflation dynamics expected to remain weak over the medium term under the baseline, the ECB should look through transitory inflation pressures and maintain a highly accommodative monetary policy stance,” the Washington-based fund said in a report. 

The comments chime with the views of ECB president Christine Lagarde, who insists that soaring prices are due to factors that won’t endure, such as energy costs and supply snags. 

In contrast, US Federal Reserve chair Jerome Powell said last week that “transitory” is a word that should no longer be used to describe what is happening.

The IMF cautioned that risks to inflation in the eurozone “are tilted to the upside”, and that officials should keep an eye on pay pressures, stating that: 

Upcoming wage negotiations, which are expected to be more frequent than in previous years after many contract renewals were put on hold during the pandemic, will need close monitoring. 

The IMF also said the ECB would need to “clarify soon” how to keep up monetary support when its Pandemic Emergency Purchase Programme and the third rounds of ultra-cheap loan offerings are phased out. 

The central bank has flagged that it plans to set out the future of its bond purchases at its December 16 decision.

Regarding eurozoze growth, IMF managing director Kristalina Georgieva said she saw the possibility of a “modest downward revision” to economic forecasts for the region, due to a fourth quarter that “looks weaker”, given supply snags, high energy prices, and new mobility restrictions due to the pandemic. 

The IMF currently predicts 5% expansion for 2021 and 4.3% for 2022 and is scheduled to publish updated forecasts in January. 

Meanwhile, eurozone finance ministers remained upbeat today about economic growth prospects despite the Omicron coronavirus variant, and they agreed to continue moderately supportive fiscal policy next year.

The Omicron variant has increased concern among some economists that more lockdowns could be in store, which could lower growth after this year's rollercoaster ride. However, the ministers were less concerned.

"The euro area economy is recovering from the recession faster than expected," the eurogroup ministers said in a statement, citing the latest European Commission forecasts for GDP growth of 5% in 2021 and 4.3% in 2022: 

Moreover, the level of uncertainty is particularly high, risks are substantial and new headwinds to the economic outlook have emerged. 

To counter the uncertainty, the eurozone would keep pumping cash into the economy, even though, to some extent, it has learned to adapt to the pandemic and has grown more resilient.

"The Eurogroup agrees that a moderately supportive fiscal stance in the euro area for 2022 is appropriate," the statement said. 

• Bloomberg and Reuters

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