ECB must keep rates at or near 4% through 2024 to get inflation down: IMF
The International Monetary Fund (IMF) has urged the European Central Bank (ECB) to hold interest rates at or near record highs through next year to extinguish price pressures and get inflation down. Rapid wage growth in the euro zone could keep inflation elevated longer, and the IMF believes that monetary policy is appropriately tight and needs to remain so in 2024
Reuters
The ECB broke a streak of ten straight rate hikes last month, fueling market expectations that its next move will be a cut, possibly as soon as April, with a total of 90 basis points of reductions priced in by the close of next year.
However, the head of the IMF’s European Department, Alfred Kammer, argued that the ECB’s deposit rate should stay close to its record high 4% level through all of next year.
Kammer warned the ECB against cutting rates too soon because that would require even more costly policy tightening later on.
“It is less costly to be too tight rather than to be too loose,” Kammer said.
The IMF sees price growth back at target in 2025, but an exceptionally tight labor market could push this date back to 2026. Unemployment is already at a record low, and whatever slack is left in the labor market could be less than now calculated, pushing up wage inflation, which would then impact consumer prices. Real wages also have some way to go to catch up with inflation, and this could also keep up the price pressure, the IMF said.
The conflict in Gaza had pushed up global energy costs, which creates further upside risk for prices. However, overall economic growth in the current quarter is somewhat weaker than projected, which could limit price pressures. Still, growth is broadly in line with expectations, and a “soft landing” is still the IMF’s main scenario rather than a deeper recession.
