IMF asks the ECB to raise rates further despite negative effects on the labor market

He International Monetary Fund (IMF) today asked central banks to continue raising interest rates and maintain a restrictive monetary policy until underlying inflation declines, despite the negative effects it may have on the labor market.

“Monetary policy should continue to tighten and remain in tight territory until core inflation is on a clear downward trend”, defended the first deputy managing director of the IMFGita Gopinath, during the opening session of the annual forum of the European Central Bank (ECB).

Gopinath, who was speaking during the meeting held in Sintra (Portugal), defended that the ECB and other central banks must be prepared to react “forcefully” in the face of inflation, “even if it means cooling the job market much more”.

And he warned that, if the central banks do not act, the cost could be “significantly higher”.

The deputy director of IMF pointed out that the “worrying“is that high inflation sustained over time”could change the dynamics” of the rise in prices and further complicate the task of reducing it.

He also assured that the measures taken so far by the ECB They have not had enough effect: “Even though that him ECB has raised rates to 4%, activity has only slowed modestly“, said.

In her speech, the economist pointed out three uncomfortable truths about monetary policy, such as that inflation is taking too long to return to its target and that financial tensions can lead to conflicts between central banks’ price and financial stability objectives.

In addition, central banks will likely experience more upside inflation risks than before the pandemic due to structural changes such as supply chain shocks and the climate emergency.

For this reason, he considered that strategies and tools such as massive debt purchases (“quantitative easing”) have to “improve” and it is necessary to be “more cautious“with its use”out of a recession”.

“The battle will not be easy (…) We cannot have sustained growth without recovering price stability”, he concluded.

Inflation, in the focus of the ECB

Gopinath thus opened the ECB’s annual forum, after a brief introduction by the president of the European entity, Christine Lagarde.

The forum brings together governors of central banks, academics and representatives of the financial sector every year to discuss monetary policy, this time with stabilization in an environment of volatile inflation as the common thread.

Lagarde will make the introductory speech this Tuesday and will give way to panel sessions, with topics such as energy markets.

On Wednesday, the monetary policy panel will bring together the ECB president with the president of the Federal Reserve (Fed) of the United States, Jerome Powell, and the governors of the Bank of England, Andrew Bailey, and of Japan, Kazuo Ueda.

The forum has been held since 2013 in the town of Sintra and replicates a model that the US Fed has been putting into practice since 1978 in Jackson Hole (Kansas, USA).

This year, the meeting takes place less than two weeks after the ECB announced a quarter-point rise in interest rates to 4%, a level not reached since the adoption of the euro.

The entity also advanced a “likely” Additional hike for July.

Source: EFE