The International Monetary Fund (IMF) has urged European central banks to increase interest rates to combat inflation, warning that policymakers who pause hikes often have to make further attempts to rein in inflation, leading to even more damage to the economy. The European Central Bank and other central banks in the region have followed the US Federal Reserve in hiking interest rates since last year to address inflation. However, with economic growth and inflation slowing, there has been speculation that central banks may pause their hikes to let the impact of measures work through the economy. The IMF believes that central banks should still raise interest rates, as it fears that energy price increases are contributing to price increases throughout the economy.
The IMF called on European countries to reduce their budget deficits, as spending increased in response to the pandemic and to support consumers and industries impacted by a jump in energy prices following Russia’s invasion of Ukraine. The IMF also noted that labour markets in the eurozone are “super tight,” and there is room for wages to increase. For the ECB, which is meeting next week on interest rates, the IMF recommends “tightening for longer,” estimating until mid-2024 to bring inflation down to target sometime in 2025. Despite concerns about the banking system, the IMF said that bringing down inflation should be the priority.
