European policymakers are being warned that easing too soon might be a very costly mistake.
(Bloomberg) — The European Central Bank will need to keep borrowing costs at current levels throughout next year if it wants to bring back inflation to 2% by the end of 2025 — not accounting for any additional price pressures that may emerge, according to the International Monetary Fund.
Policymakers should be open to considering additional rate increases if needed, Alfred Kammer, the head of the IMF’s European department, said at Bloomberg’s Future of Finance conference in Frankfurt. They should also be aware that easing too soon might be a very costly mistake.
“We are expecting inflation will be brought to target in the second half of 2025, but that’s a long time, and there could be a lot of bumps in the road,” Kammer said. “It would also mean to maintain the level of current policy rates throughout 2024.”
The ECB raised interest rates last week for the 10th straight time and signaled that — barring any surprises — it intends to keep them unchanged for a “sufficiently long” time. Alongside the decision came significant cuts to the euro zone’s growth outlook and forecasts for stronger inflation this year and next.
The projections don’t take into account near stagnation in the second quarter nor the latest oil-price spike. ECB President Christine Lagarde did acknowledge though that growth has been “very, very sluggish” since late 2022.
Kammer argued that officials should react more forcefully to shocks that keep inflation high for longer than positive surprises — “because getting this wrong will increase the costs of the disinflation efforts.”
So “be open, leave the door open for additional action on the monetary side,” he said. “It cannot be closed at this point.”
Some policymakers including Slovenia’s Bostjan Vasle and Austria’s Robert Holzmann have already suggested that more hikes might be needed to ensure inflation will reach 2% in the second half of 2025. Latvia’s Martins Kazaks said he “wouldn’t want to see it happen any later,” so betting on rate cuts in the first half of next year would be a mistake.
Speaking alongside Kammer, the ECB’s director general for economics — Oscar Arce — highlighted there’s still “a lot of uncertainty” surrounding the inflation outlook. He said that his economists have gotten better at anticipating price pressures and wage developments, raising confidence in the institution’s forecasts.
“We are projecting significant additional disinflation,” Arce said. “For this disinflation to materialize, some important hypotheses also have to hold.”
An important one, he said, was a moderation in wages and profits.
“At this stage, the risks around inflation are still very important and very high, but I tend to see them more balanced than what we saw last year.”
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