Friday 22 November 2019

IMF warns Europe not ready to end QE stimulus

The headquarters of the European Central Bank (ECB) (R) is seen next to the famous skyline in Frankfurt. Photo: Reuters
The headquarters of the European Central Bank (ECB) (R) is seen next to the famous skyline in Frankfurt. Photo: Reuters
Donal O'Donovan

Donal O'Donovan

The ECB should keep pumping cheap cash into the financial system because inflation remains below target, the IMF has warned.

The central bank in Frankfurt is expected to begin easing back on its massive €2.3 trillion quantitative-easing programme from the end of the year, and to start guiding the market on this plans as early as September.

But the IMF said the ECB should maintain a "firmly accommodative" monetary policy for an "extended period".

The IMF said calls for an exit from easy-money policy were "premature" because consumer prices were not increasing enough, in its annual report on the Eurozone.

The IMF estimates that inflation will be around 1.6pc this year, slowing to 1.5pc in 2018, which is under the ECB target of inflation below but close to 2pc.

"The costs of a long period of inflation undershooting continue to exceed those of a temporary overshoot," the IMF said.

"The calls from some quarters for an exit from monetary accommodation are therefore premature," it added.

Germany has been the biggest critic of ECB's 2.3 trillion euro money-printing programme.

The ECB is under pressure from Germany in particular to ease back on a massive bond buying spree that is supposed to fight low inflation by stimulating economic growth with a flow of cheap credit.

The ECB is preparing to take a decision in the autumn on whether to scale back its stimulus programme.

To help a sustained recovery of inflation, the IMF encouraged Germany and other Eurozone countries with high growth to push for "robust" wage and price rises, even if this could bring domestic inflation beyond the 2pc limit for a limited period.

Germany, the bloc's largest economy, should also increase public investments, a move that could stimulate growth and structural reforms in weaker Eurozone countries, such as Italy, it said.

At the same time, Italy and other high-debt countries should take advantage of the recovery to carry out reforms and build buffers against future shocks, the IMF recommended.

In spite of an improved outlook, the Eurozone maintains vulnerabilities, especially in its banking sector where bad loans remain a drag on European lenders' balance sheets, the IMF warned.

Irish Independent

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