The IMF urges the ECB not to give up its fight against inflation despite risks to growth

MADRID, 27 Jun.

The IMF urges the ECB not to give up its fight against inflation despite risks to growth


The European Central Bank (ECB) and the rest of the main central banks must face the "inconvenient truth" that inflation is taking too long to return to the target, so they must persevere in their commitment, despite the risks of a weaker economic growth and increased financial tensions, as noted by the International Monetary Fund (IMF).

In her speech at the inauguration of the annual forum organized by the ECB in the Portuguese town of Sintra, Gita Gopinath, the IMF's first deputy director general and Kristalina Georgieva's 'right hand' at the head of the institution, has warned that, although the headline inflation rate has declined, central banks must continue to struggle as they determine if and how monetary policy strategy should be adapted going forward.

In this sense, the 'number two' of the IMF has listed three "inconvenient truths" that must be faced by those responsible for monetary policy, starting with the fact that "inflation is taking too long to return to the target", which means that banks Central governments, including the ECB, must remain committed to fighting inflation despite the risks of weaker economic growth.

Likewise, a second uncomfortable truth for the IMF official is that financial turmoil could create tensions between central banks' financial stability and price objectives, while thirdly, she has warned that, in the future, it is likely that central banks experience more upside inflation risks than before the pandemic.

Consequently, for Gopinath it is necessary for institutions to improve monetary policy strategies and the use of tools such as forward-looking guidance and quantitative easing.

In her analysis, the IMF economist has acknowledged that some of the side effects of monetary policy's fight against inflation could be mitigated by giving fiscal policy a greater role, noting in particular that economic conditions call for fiscal adjustment that it could help cool demand and reduce the need to raise interest rates, especially if done jointly by a large group of countries.

"At the very least, it is critical that euro area governments resist any temptation to dilute projected deficit reduction with current policies," he warned.

Ultimately though, for Gopinath it is up to central banks to deliver price stability regardless of fiscal stance.

Given that core inflation is high and upside inflation risks are considerable, risk management considerations in the euro area suggest that monetary policy "should continue to tighten and then remain in tight territory until core inflation rebounds." in a clear downward trend.

In this way, it has defended that the ECB, and other central banks in a similar situation, should be prepared to react strongly to new upward inflationary pressures.

"The costs of fighting inflation will be significantly higher if a prolonged period of high inflation boosts inflation expectations and changes inflation dynamics," he added.