IMF Urges ECB to Boost Asset Purchases and Consider Rate Cut
(Bloomberg) -- European Central Bank officials should consider all options, including cutting interest rates again, as part of their response to the worsening economic outlook, the International Monetary Fund said.
New virus lockdowns are dragging the euro-area economy back into a slump, and the IMF warned that unless the course of the pandemic changes “significantly,” any recovery early in the first quarter will be weaker than the fund predicted just a few weeks ago. That also means bank dividends and share buybacks should stay on hold until the recovery is in full swing, it said.
“Additional stimulus will be needed to facilitate a sustained increase in inflation,” the IMF said in its annual assessment of the 19-member euro-area economy. “Expanding asset purchases will be the first line of defense,” though options including relaxing the terms of ultra-cheap loans for bank or a cut to the deposit rate should also be considered.
ECB policy makers led by President Christine Lagarde are widely expected heed that advice, increasing and extending their 1.35 trillion-euro ($1.6 trillion) pandemic asset-purchase program on Dec. 10 as well as offering more cheap loans. As of yet, policy makers have not signaled any willingness to cut interest rates, out of concern for the damage that may inflict on the banking sector.
The fund added that even more policy accommodation would be needed if worse pandemic scenarios than currently expected materialize, possibly including “direct support to non-financial corporates.”
A delay in deployment of the European Union’s fiscal recovery fund could hamper the recovery and high unemployment could lead to “scarring” that undermines the region’s potential for growth, the fund warned.
“Risks are dominated by pandemic dynamics,” it said. “They remain clearly to the downside through early 2021 given the ongoing second wave.”
The IMF also gave its backing to the notion of allowing a period of above-target inflation to compensate for current sub-par price pressures.
ECB officials are conducting a review of their monetary policy framework, including the long-standing commitment to targeting rates of inflation close to but below 2%.
“A clear, transparent, and well-communicated symmetric inflation point target has significant benefits,” the IMF said. “We recommend formally codifying the Governing Council’s recent emphasis on the symmetry of the inflation aim and changing that aim to a specific point target.”
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