IMF backs ECB’s easy policy as it sees inflation easing

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© Reuters. FILE PHOTO: The European Central Bank (ECB) logo in Frankfurt, Germany, January 23, 2020. REUTERS/Ralph Orlowski/File Photo
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FRANKFURT (Reuters) – The European Central Bank has been right to maintain its easy money policy as inflation is set to fall after “transient boosts” from supply snags that may extend into next year, the International Monetary Fund said on Thursday.

Backing from her former employer was likely to bring some relief to ECB President Christine Lagarde as she struggles to persuade investors that she is not about to jack up interest rates in the face of record inflation.

The Washington-based institution said past data suggested that wages in the euro zone would rise only modestly and that inflation, which hit 5.1% last month, would fall back below the ECB’s 2% target.

“We expect inflation to fall slightly below the European Central Bank’s target once the pandemic fades,” read a blog post signed by managing director Kristalina Georgieva and two other officials.

“The ECB has appropriately decided to maintain an accommodative monetary stance until its medium-term inflation target is met while preserving its flexibility to adjust course if high underlying inflation proves more durable than expected.”

Lagarde, Georgieva’s predecessor at the helm of the IMF, repeated on Monday that any change to the ECB’s ultra-easy policy of massive bond purchases and negative interest rates would be gradual.

But she failed to convince investors, who are still pricing in rate hikes worth 50 basis points by the end of the year.

The IMF’s post was based on a new paper estimating that euro zone GDP would have been 2% higher last year had it not been for supply constraints, caused by lockdowns and by shortages of everything from containers to skilled workers.

This supply shock accounted for half the increase in euro area producer price inflation excluding energy prices last year, the IMF said.

It warned that bottlenecks may last longer than expected and possibly into 2023 due to the spread of the Omicron variant of the coronavirus, posing a challenge for central bankers trying to support the economy while keeping a lid on inflation.

“Keeping medium-term inflation expectations stable despite transient boosts to inflation, including from supply disruptions and surging energy prices, is key to managing this trade-off,” the IMF said.