The European Central Bank should cut interest rates and keep its crisis measures in place to help euro-region growth and support the banking system, according to the International Monetary Fund.
“Given the broad need for fiscal adjustment, much of the burden of supporting growth falls on monetary policy,” the Washington-based lender said today in its World Economic Outlook. “The ECB should lower its policy rate while continuing to use unconventional policies to address banks’ funding and liquidity problems.”
The ECB cut its benchmark rate to a record low of 1 percent in December and pumped 1 trillion euros ($1.3 trillion) into the banking system to secure the supply of credit to households and companies. The euro-area economy is projected to shrink by 0.3 percent in 2012, an improvement from the 0.5 percent contraction the IMF forecast in January. The region will return to 0.9 percent growth in 2013, up from the fund’s previous forecast of 0.8 percent.
The euro extended losses after the forecast was released, trading at $1.3109 at 4:08 p.m. in Brussels, down 0.3 percent.
While the ECB’s two three-year loans have helped alleviate “funding pressures in the banking sector” and in “stabilizing market sentiment,” a further rate cut would “ensure that inflation develops in line with its target over the medium term and guard against deflation risks, thereby also facilitating much-needed adjustments in competitiveness,” the IMF said.
The “overarching policy priority in Europe” is to prevent a renewed escalation of the debt and growth crisis, while “working toward resolution of the underlying causes,” the fund said.
To limit any damage from bank deleveraging, governments should “in some cases” help lenders to raise their capital levels. There is also “a need for a pan-euro area facility with the capacity to take direct stakes in banks, including in countries with little fiscal room to do so themselves.”
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