THE INTERNATIONAL Monetary Fund (IMF) has dropped its view that the European Central Bank has room to cut interest rates this year after concluding that euro zone growth has proved unexpectedly brisk in spite of global economic turmoil.
Conceding that its 2008 forecast for the euro zone would have to be revised significantly higher, the IMF said in its latest report on the region that growth across the 15-state bloc would average about 1.75 per cent this year.
After the unwinding of recent "shocks", growth would rebound in late 2009 "making for a mild slowdown by the standards of recent history". The tone contrasted with its mood just two months ago, when it had expected just 1.4 per cent growth this year.
The IMF said in April that its forecast for inflation to slow next year meant the ECB could already "afford some easing of the policy stance", but said yesterday that the bank should wait to ensure price gains don't feed into wages.
Policymakers will have room to cut interest rates "further ahead"should its forecast prove correct, the IMF said. "The central question for monetary policy is how to balance the risk of a broad-based increase in inflation with the prospect of gradually building disinflationary forces generated by the economic slowdown . . . In these circumstances, it is appropriate to keep policy rates on hold."
Alessandro Leipold, acting director of the IMF's European department, argued the organisation had "got the number wrong but the story right". Euro zone growth, which reached 2.6 per cent last year, would still be hit by the global financial market turmoil and the US slowdown. The euro zone had proved "a good shock absorber, but not an impenetrable shield", he said.
While other forecasters had become gloomier about 2009, the IMF's forecast of only about 1.2 per cent growth next year remained unchanged.
The revised outlook was welcomed by Jean-Claude Juncker, Luxembourg's prime minister, who chairs "eurogroup" meetings of euro zone finance ministers. It showed confidence in the euro zone's resilience "was not wishful thinking", he said.
The eurogroup met in Frankfurt yesterday before celebrations marking the ECB's 10th anniversary. But Mr Juncker warned that the IMF was "slightly too optimistic" about the inflation outlook and that "vigilance" was essential.
He also hinted strongly that the deteriorating economic outlook could blow off course some eurozone countries' fiscal consolidation attempts. Eurozone finance ministers' pledges to balance budgets by 2010 were conditional on economic circumstances, "and there we have had several surprises", he warned.
Mr Juncker rebuffed last week's call by Nicolas Sarkozy, the French president, for the impact of higher oil prices to be softened by suspending value added tax on fuel above a certain unspecified level. He described as "music to our ears" the IMF's conclusion that Europe's 10-year-old monetary union had been a "distinct success". - (Bloomberg, Financial Times service)
