Europe is in a temporary soft patch but if the economy does not show signs of picking up over the third quarter of the year the European Central Bank should not rule out cutting interest rates, IMF Managing Director Rodrigo Rato said today.
The ECB has left interest rates on hold for two years in a row and is facing growing pressure from lobbyists and politicians to cut rates to kick-start sluggish growth in the euro zone.
"If the weakness will continue we believe the ECB should not rule out cutting interest rates," Mr Rato said.
The euro zone expanded by 0.5 per cent in the first quarter of the year but Mr Rato said the outlook for the second quarter was weak, and the ECB might have to act if the weakness persisted.
"We see, especially in the second quarter, a weakening in some countries but we believe it is a temporary weakening," he told journalists after addressing a conference in Frankfurt.
"If ... weak internal demand persists beyond the third quarter of this year some reaction has to be taken on the macroeconomic front and one of them is monetary policy."
European Central Bank Governing Council member Christian Noyer said today low long-term interest rates could not persist forever.
Mr Noyer said the low level of global long-term interest rates was something of an enigma, but went on to add that he would like to believe the credibility of central banks in keeping inflation low had helped push rates lower.
Mr Noyer, who is also governor of the Bank of France said global liquidity was abundant and this created tension with the credibility of central banks' attempts to keep inflation low.
"Global liquidity is abundant and this is a concern for central bankers," he said. "A choice must be made and the choice is clear," he said.
Turning to China, Noyer said it was hard for an emerging economy with such a large population to have as high quality data as figures produced by the United States, which he said was the benchmark.
"Beware of the data, you have to take it with circumspection," Mr Noyer said, referring to Chinese statistics. He added "there are real salary tensions" in China.
But he added the prices of industrial goods exported from China could rise, not least because China faced higher oil prices, like other countries. Mr Noyer also said many euro zone states needed structural reforms to raise their growth potential.
"One can't live in a world where long-term interest rates will be very low forever," Mr Noyer said.