ECB Must Maintain Rates at or Near 4% Through 2024 to Tackle Inflation – IMF, By Reuters

FRANKFURT (Reuters) – The rapid increase in wages within the euro zone may prolong elevated inflation levels, prompting the International Monetary Fund (IMF) to advise the European Central Bank (ECB) to maintain interest rates at or near record highs throughout the coming year in order to mitigate price pressures.

Last month, the ECB halted a series of ten consecutive rate hikes, leading to market speculation that a rate cut could occur as soon as April, with expectations for a total reduction of 90 basis points by the end of next year.

Countering the anticipation for early rate cuts, Alfred Kammer, head of the IMF’s European Department, asserted that the ECB’s deposit rate should be kept close to its current record high of 4% throughout 2024.

“Monetary policy is appropriately tight and needs to remain so in 2024,” Kammer stated at a news conference, emphasizing that the deposit rate should ideally remain at or near that level during the entire year.

Kammer cautioned the ECB against premature rate cuts, warning that such moves could necessitate even steeper tightening in the future. “It is less costly to be too tight rather than to be too loose,” he noted, stressing the importance of avoiding “premature celebrations.”

Inflation, which soared above 10% a year ago, has gradually been declining; however, the final stages of disinflation could prove challenging, potentially taking up to two years to decrease from around 3% to the target of 2%. While the IMF projects the return of price growth to target levels by 2025, it cautioned that a highly competitive labor market might delay this timeline to 2026.

With unemployment rates already at a record low, any remaining slack in the labor market could be less than previously estimated, contributing to wage inflation and, consequently, higher consumer prices. According to the IMF, real wages have yet to fully catch up with inflation, which could further sustain price pressures.

The IMF reported, “Risks remain skewed toward more persistent inflation. Under adverse assumptions, this could delay reaching inflation targets to 2026.” Additionally, Kammer highlighted that the ongoing conflict in Gaza has spiked global energy costs, presenting further upward pressure on prices.

Despite the concerns, economic growth in the current quarter has been slightly weaker than anticipated, which may help to alleviate some price pressures. Overall, growth is largely aligning with expectations, and Kammer indicated that the IMF still considers a “soft landing” to be the primary scenario rather than a more severe recession.