IMF: ECB should keep raising rates, EU must tighten fiscal policy

STOCKHOLM  -The International Monetary Fund called on the European Central Bank on Friday to keep raising interest rates until the middle of 2024 and on European Union finance ministers to tighten fiscal policy in concerted action to bring down high inflation.

The head of the IMF’s European Department Alfred Kammer said ahead of a meeting of EU finance ministers and central bank governors in Stockholm that inflation was the biggest worry.

“Our main policy recommendation is to defeat inflation and that means we need to use the instrument of monetary policy. For the ECB that means further tightening, tightening for longer – we estimate until mid-2024 – in order to bring inflation down to target sometime in 2025,” Kammer said.

“Inflation is a tax, in particular on the poor, and that needs to be tackled.”

Headline inflation in the 20 countries using the euro was 6.9 percent year-on-year in March, but core inflation, which excludes large swings in energy and food prices, was even higher at 7.5 percent.

https://business.inquirer.net/394018/euro-zone-inflation-posts-record-drop-but-core-prices-accelerate

To bring inflation down to its target of 2 percent , the ECB has been aggressively raising interest rates, taking them from zero in mid-2022 to 3.5 percent in March, but few in financial markets expect the policy tightening to continue beyond 2023.

Economic data from across the euro zone on Friday painted a mixed picture for growth and inflation, potentially making the ECB’s interest rate decision next week – whether to raise rates by 25 or 50 basis points – more difficult.

Kammer said EU finance ministers had to support the ECB by reducing the fiscal stimulus to the economy that they rolled out during the COVID-19 pandemic and then continued during a cost-of-living crisis triggered by Russia’s invasion of Ukraine.

“Inflation cannot be just dealt with by the central bank, you need fiscal policy to support it,” Kammer said, adding an expected substantial reduction in budget deficits in 2023 in EU countries did not materialize because government packages to support citizens against high energy prices were extended.

“So … we are recommending now, with energy prices coming down … to phase out cost of living packages and, if they’re not being phased out, to make them more targeted,” Kammer said.

https://business.inquirer.net/386371/europes-spending-on-energy-crisis-nears-800-billion-euros

“When you have a fiscal contribution, that means the (ECB) tightening does not need to be so high, it means interest rates can stay lower, that means less financial stress.”

The IMF’s call was heeded by Swedish Finance Minister Elisabeth Svantesson, who said inflation was her main focus.

“It is a priority here in Sweden because if inflation does not come down we will have problems for many years ahead,” Svantesson said. “I know it is also the priority of many other finance ministers.”

Spanish Finance Minister Nadia Calvino told reporters Spain would bring down its budget deficit to 3% of GDP – the EU’s upper limit – as soon as in 2024, a year earlier than planned, thanks to stronger growth and job creation.