The International Monetary Fund has urged the European Central Bank to continue tightening monetary policy until mid-2024 to curb high inflation, which, according to the IMF, causes the greatest concern.
"If the ECB follows our recommendations, then, according to our estimates, consumer inflation in the eurozone will return to the target level of 2% sometime in 2025," the IMF said.
The final data published by Eurostat showed that consumer price growth slowed in March, confirming economists' forecasts and reaching its lowest level since February 2022. However, core inflation growth accelerated to a record high. According to the report, the consumer price index rose by 6.9% per year after an increase by 8.5% in February. The core consumer price index - excluding energy, food, alcohol and tobacco - rose by 5.7% per year (fresh record high) after an increase by 5.6% per year in February. Economists also expected an increase of 5.7% per annum. ECB policymakers see underlying price growth accelerating for another few months before a plateau, and a meaningful decline may not come before the autumn.
To reduce inflation, the ECB raised the interest rate by 3.5% from mid-2022, but few in the markets expect the policy tightening to continue beyond 2023. At its March meeting, the ECB raised all three key interest rates by 50 basis points, saying that inflation in the eurozone is likely to remain "too high" for a long time. The new forecasts suggest a price increase above the target level of 2% by 2025. Inflation is expected to average 5.3% this year, 2.9% in 2024 and 2.1% in 2025. At the same time, the ECB stressed that these forecasts were formed before the turmoil in the banking sector.
Meanwhile, the IMF said that EU finance ministers also had to support the ECB by reducing fiscal stimulus for the economy. "Inflation cannot be managed only with the help of the central bank, fiscal policy is needed to support it. We recommend now, when energy prices are declining, to phase out the cost of living packages and, if they're not being phased out, to make them more targeted," the IMF added.