The International Monetary Fund (IMF) has called on the European Central Bank to keep raising interest rates until mid-2024, and urged European Union finance ministers to tighten fiscal policies through coordinated action to reduce inflation. The IMF's Europe chief, Alfred Kammer, said high inflation was the biggest concern. He made the comments on April 28 ahead of a meeting with EU finance ministers and European Central Bank governors.
"Our main recommendation, as far as policies are concerned, is to defeat inflation and this means that we must use the instrument of monetary policy. For the European Central Bank, this means further tightening, for a longer period, we estimate until mid-2024, in order to reduce inflation to the target set sometime in 2025," said Kammer.
“Inflation is a tax, especially on the poor, and we must fight it,” he added. Inflation in the 20 countries that use the euro was 6.9 percent in March — compared with the same period a year earlier — but core inflation, which excludes large fluctuations in energy and food prices, was 7.5 percent. To reduce inflation, the European Central Bank has been aggressively raising interest rates, taking them from zero in mid-2022 to 3.5 percent in March this year, but markets expect this policy to continue beyond 2023.
Kammer said EU finance ministers should help the European Central Bank by reducing the fiscal stimulus for the economy that they used during the COVID-19 pandemic and continued to apply during the cost of living crisis caused by Russia's invasion of Ukraine.
"Inflation cannot be fought by the Central Bank alone, we need fiscal policies that support it," Kammer said and added that a reduction in the budget deficit in EU countries was not implemented because of the aid packages that governments gave for citizens to cope with high energy prices, were in force for a longer period.
“Therefore, we now recommend, as energy prices are falling… that cost-of-living packages are not applied or that they are more targeted,” he said. The issue of the balance between monetary and fiscal policies, as well as inflation, are on the agenda of talks by EU finance ministers and central bank governors, who will meet in Stockholm on Friday and Saturday.
