ECB Should Keep Highly Accommodative Policy Stance, IMF Says

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The European Central Bank should stick with its ultra-supportive stance as long as the current bout of surging consumer prices appears to be temporary, the International Monetary Fund said.

“With underlying inflation dynamics expected to remain weak over the medium term under the baseline, the ECB should look through transitory inflation pressures and maintain a highly accommodative monetary policy stance,” the Washington-based fund said in its Staff Concluding Statement for 2021.

The comments chime with the views of ECB President Christine Lagarde, who insists that soaring prices are due to factors such as energy costs and supply snags that won't endure. In contrast, Federal Reserve Chair Jerome Powell said last week that “transitory” is a word that should no longer be used to describe what's happening.

The IMF cautioned that risks to inflation in the euro area “are tilted to the upside,” and that officials should keep an eye on pay pressures. 

“Upcoming wage negotiations, which are expected to be more frequent than in previous years after many contract renewals were put on hold during the pandemic, will need close monitoring,” the fund said. “The ECB should also stand ready to scale down and then terminate asset purchases and TLTROs, followed by a gradual adjustment of policy rates, should high inflation prove to be more durable.”  

The IMF also said the ECB will need to “clarify soon” how to keep up monetary support when its Pandemic Emergency Purchase Program and the third rounds of ultra-cheap loan offerings -- TLTROS -- are phased out. The central bank has flagged that it plans to set out the future of its bond purchases at its Dec. 16 decision. 

Regarding euro-area growth, IMF Managing Director Kristalina Georgieva said she sees the possibility of a “modest downward revision” to economic forecasts for the region, due to a fourth quarter that “looks weaker” given supply snags, high energy prices, and new mobility restrictions due to the pandemic. The IMF currently predicts 5% expansion for 2021 and 4.3% for 2022 and is scheduled to publish updated forecasts in January. 

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