IMF Advises Central Banks in Europe to Maintain Higher Interest Rates Amid Persistent Inflation

The International Monetary Fund (IMF) has advised central banks in central, eastern, and southeastern Europe to maintain higher interest rates for longer due to persistent high inflation. This guidance comes as central bankers in these regions face pressure to protect their currencies and reconsider their policy choices amid the strength of the US dollar.

Alfred Kammer, the IMF's European Department Director, stated that while Europe has done remarkably well against a turbulent backdrop, a soft landing for the continent's economies is not yet a done deal. "To achieve this, the macroeconomic policy mix needs to be just right, with monetary policy easing matching unfolding conditions in advanced Europe, while central banks in many CESEE economies need to maintain a tight stance for longer to fully rein in inflation," Kammer said.

Why this matters: The IMF's guidance highlights the ongoing challenges faced by central banks in Europe as they navigate the complex economic landscape. The persistence of high inflation and the need to protect currencies underscore the delicate balancing act required to achieve a soft landing for these economies.

The IMF emphasized that Europe needs to raise its growth potential to catch up to the global income frontier, which will require deeper European integration and reforms at the domestic level, rather than resorting to measures that could fray the single market. Fiscal adjustment also needs to pick up, with countries rebuilding buffers through faster and less back-loaded fiscal consolidation.

For advanced European economies, central banks preparing to begin cutting interest rates need to match that policy easing with "unfolding conditions - loosening neither too fast nor too slowly." For the rest of Europe, rates will need to remain higher for longer to ensure inflation is fully contained.

The IMF struck a cautiously optimistic tone on Europe's economy, while warning that the longer-term outlook still faces challenges. "A 'soft landing' for Europe's economies - bringing inflation back to target with a moderate economic cost in terms of growth - is within reach, but crosswinds could make it difficult to achieve price stability while securing a lasting recovery," the IMF sees.

The IMF expects the easing cycle in the euro area and the UK to begin in "mid- to late 2024 and proceed through the end of 2025", with the European Central Bank needing to continue a "data-dependent meeting by meeting approach" on monetary policy. The IMF's guidance underscores the persistent challenges posed by high inflation and the need for central banks in Europe to maintain a cautious and data-driven approach to monetary policy to achieve a soft landing for their economies.

Key Takeaways

• IMF advises central banks in Europe to maintain higher rates for longer to curb inflation.
• Europe faces challenges in achieving a 'soft landing' amid strong US dollar and high inflation.
• Monetary policy easing in euro area and UK expected to begin in mid-to-late 2024.
• IMF emphasizes need for fiscal adjustment and deeper European integration to boost growth.
• Central banks must take a cautious, data-driven approach to monetary policy to achieve soft landing.