The European Central Bank (ECB) seems to have reached its goal and is not going to raise interest rates any further, after having gone from having them in negative territory to raising them to 4.5% in 14 months. This is what the International Monetary Fund (IMF) believes, which, however, warns that “a prolonged restrictive policy is necessary to guarantee that inflation returns to the target.” [del 2%]” and thus “insure against negative surprises,” he explains in a report on Europe and the euro zone released during the early hours of this Wednesday. The same document anticipates a soft landing for the monetary area economy and emphasizes that while general inflation “is falling rapidly,” “core inflation remains substantially above the central banks’ objectives.”
It has been almost two years since inflation once again claimed a place among the concerns of those responsible for economic and monetary policy around the world. After being quite off the radar, he claimed prominence thanks to the rise in energy prices, a phenomenon that worsened with the invasion of Ukraine by Russia and its impact on the price of gas. To control it, central banks used the old manual that says that the price of money must be made more expensive to keep others at bay. So interest rates went up. They should have done it sooner in the euro zone, IMF economists explain, because, according to their numbers, “underestimating the persistence of inflation could cost the euro zone one percentage point of gross domestic product.” This cost would arise because central banks would have had to make extra efforts to guarantee price stability.
“The European Central Bank should maintain its restrictive monetary policy, as inflation is expected to return to the target no later than 2025,” details the document, which also adds that “the Eurosystem should continue to reduce its holdings of euro bonds.” gradually and predictably to reduce its footprint on the economy.”
Despite the calculation made in Washington, headquarters of the IMF, on how inflation has reduced growth, the institution’s economists point out that “domestic demand has been reduced during the summer, a substantial recession has been avoided, in part due to the strength of labor markets”. However, in the second half of this year, the institution led by Kristalina Georgieva foresees a “soft landing” of the European economy, which is why they venture that growth in 2023 will be 1.5% of GDP and not 1.7%. as noted in the forecast released in July.
Following in the footsteps of other international institutions and organizations (European Commission, ECB, OECD), the IMF recommends that the countries of the euro zone implement fiscal adjustments. The objective is twofold: on the one hand, it helps maintain control over inflation; and, on the other hand, it is about achieving “fiscal space” to protect and support public investment. The greatest effort would have to be made by “countries with significantly higher inflation.”
Another goal of implementing fiscal “consolidation” is to reduce debt to ensure that it is sustainable. The enormous volumes accumulated—especially in some countries in the euro zone—with the concatenation of three very large crises in the last 15 years (the financial crisis of 2008, the one unleashed by the pandemic and the one brought about by the invasion of Ukraine) have led to the markets and the bodies prescribing economic policies not giving up in their efforts to point out its reduction as one of the challenges that politicians must strive to address in the coming years.
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