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Free AccessIMF: 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
[TOPICS: M$X$$$,MC$$$$,M$$EC$]
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Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.