IMF: ECB Policy Tightening Could Pose Risks If Infl Still Low

By Christian Vits

     FRANKFURT (MNI) - The European Central Bank should refrain from tightening

its policy as long price pressures are subdued in parts of the currency bloc,

the International Monetary Fund said Tuesday.

     "Monetary policy tightening in the euro area, if it had to come while the

recovery in prices and growth is still lagging in highly indebted member

economies, could pose risks for these economies if they have not undertaken the

needed fiscal adjustment and implemented structural reforms to boost supply

potential," the Fund said in its October version of the World Economic Outlook.

     "In advanced economies, monetary policy settings should remain

accommodative until there are firm signs of inflation returning to targets.

Still-subdued wage pressures mostly reflect remaining slack, not fully captured

by headline unemployment rates," the IMF added.

     The ECB is expected to announce at its next monetary policy meeting on Oct.

26 whether and when it intends to cut its stimulus measures. So far, the bank

remained reluctant to wind down its quantitative easing as inflation is still

well below the ECB's target of "below but close to" 2 percent. It held steady in

September at 1.5%, unchanged from the previous month.

     ECB Executive Board member Sabine Lautenschlaeger, a monetary policy hawk,

said Monday the ECB should begin reducing their bond purchases next year. "This

should be done gradually, until we are no longer purchasing additional bonds."

     Persistently low inflation in advanced economies, "which could ensue if

domestic demand were to falter, also carries significant risks", as it could

lead to lower medium-term inflation expectations and interest rates," the IMF

said. In the euro zone, the Fund's forecast assumes that monetary policy will

remain "very accommodative". Short-term rates are projected to remain negative

through 2018.

     The IMF expects the euro area recovery to gather strength this year, with

growth projected to rise to 2.1 percent in 2017, before moderating to 1.9

percent in 2018. The forecast is 0.4 percentage point and 0.3 percentage point

higher for 2017 and 2018, respectively, relative to April estimates.

     The increase in growth in 2017 mostly reflects an acceleration in exports

in the context of the broader pickup in global trade and continued strength in

domestic demand growth supported by accommodative financial conditions amid

diminished political risk and policy uncertainty, the Fund noted.

     Although progress has been made in addressing European banking sector

issues, "remaining problems need to be addressed forcefully to avoid weakening

confidence and fears of adverse feedback loops between low demand, prices, and

balance sheets in parts of the euro area," the IMF warned.

     Non-performing loan (NPL) ratios were still high in the first quarter of

2017, at about 5.7 percent for the euro area, and greater than 10 percent in six

countries (including Italy, which accounts for about 30 percent of the euro

area's NPL stock).

     Profitability also remains a challenge, according to the IMF, "with

stubbornly high cost-to-asset ratios, especially for medium- and small-size

banks."

--MNI Frankfurt Bureau; +49 69 97782671; email: christian.vits@marketnews.com

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