Reported from Frankfurt, Germany (AP) — According to the international currency, the European Central Bank and other policymakers in Europe must maintain the current high interest rates until they are confident that inflation is under control, even if there is slower growth. The Treasury issued the warning on Wednesday, cautioning against premature excitement as inflation decreases from its peak.Thank you for reading this post, don't forget to subscribe!
The Washington-based IMF cautioned on the potential high cost of underestimating the persistence of inflation, which could lead to another round of significant rate increases, potentially hindering a large portion of economic growth.
The IMF conveyed at its bi-annual regional conference that central banks in Europe, including those not part of the 20-country eurozone, are nearing the peak of their interest rate cycles, with some already beginning to reduce policy rates. In view of the economic outlook for Europe, the IMF stressed the necessity for a sustained restrictive approach to ensure the return of inflation to the targeted levels.
The IMF highlighted historical data indicating that it usually takes an average of three years to bring down inflation to lower levels, with some anti-inflation efforts taking even longer. Although it seems that central banks have completed their series of rate hikes, the consequences of failure and subsequent additional rate hikes could potentially amount to a significant percentage point of the annual economic output.
Alfred Camerer, director of the IMF’s Europe department, during a press briefing, cautioned against premature jubilation when discussing the outlook. Kammerer emphasized the lesser cost of being overly stringent with interest rate policies compared to being too lenient. He also expressed that ECB, which paused its rate increases on October 26 after over a year, is currently in a favorable position.
In October 2022, inflation in the eurozone reached its peak at 10.6%, and subsequently decreased steadily to 2.9% in October.
The European Central Bank raised its base deposit rate by a substantial 4.5 percentage points between July 2022 and September 2023, from minus 0.5% to 4%. Higher interest rates are a common instrument employed by central banks to manage inflation, resulting in increased borrowing costs for financing consumer purchases, new factories, and factory equipment. This decrease in demand for goods exerts downward pressure on prices, although it could also have negative effects on growth, making it a challenging move for the ECB.
The IMF suggested that Europe is moving towards a “soft landing” after the impact of the rate increase, and it is unlikely to lead to a recession. However, growth forecasts still remain ambivalent and might either exceed or fall short of expectations.
It projected a growth rate of 0.7% for the Eurozone this year and 1.2% for the next. If inflation declines more rapidly than anticipated, it could augment actual consumer income and spending, potentially promoting growth. However, heightened escalation in Russia’s conflict with Ukraine, along with accompanying sanctions and trade disruptions, could result in weaker growth.
Currently, the short-term surge in oil prices caused by the month-long battle between Israel and Hamas in Gaza has not disrupted the European economy, according to Kammerer.