The European Central Bank (ECB) would need to move to full-scale quantitative easing if inflation in the eurozone remains in the doldrums, the IMF said.
“If inflation remains stubbornly low, the ECB should consider a large-scale asset-purchase program,” the Washington-based IMF said in an assessment of the eurozone economy. “This would boost confidence, improve corporate and household balance sheets and stimulate bank lending.”
Speaking to reporters in Luxembourg late on Thursday after making the recommendations to eurozone finance ministers, IMF managing director Christine Lagarde said inflation’s resistance to the ECB’s latest measures would represent the “stubbornness” that triggers quantitative easing.
Photo: AFP
The central bank stopped short of quantitative easing when it announced unprecedented stimulus measures on June 5, cutting interest rates to all-time lows and prodding commercial banks to increase lending. It became the first major central bank to experiment with negative rates, putting the deposit rate at minus-0.10 percent.
“I think there is no disagreement with the IMF. We’ve been clear that in case inflation would be too low for too long, we can use additional instruments, including additional non-conventional measures,” ECB executive board member Benoit Coeure told reporters in Luxembourg yesterday. “But we are not in that situation today.”
An asset-purchase program “is possible, it is in the toolbox, but it is not needed today,” Coeure said. “I do not think the IMF would disagree with that.”
The IMF gave a bleak assessment of an 18-nation economy still shaking off the debt crisis, saying that output is still below precrisis levels, inflation at 0.5 percent last month was “worryingly low” and unemployment at 11.7 percent in April was “unacceptably high.”
Progress toward a euro banking union got mixed reviews. While bank supervision will be anchored with the ECB and a system for resolving failing banks has been streamlined, “the current planned backstop may prove insufficient to break decisively bank-sovereign links,” the IMF said.
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