FRANKFURT – The head of the International Monetary Fund on Friday praised the European Central Bank's decision to raise interest rates for the eighth time in a row and its pledge to keep going as long as needed to bring down high inflation.
Managing Director Kristalina Georgieva said the IMF welcomed both the ECB's quarter-percentage point rate hike Thursday and President Christine Lagarde's vow that the ECB is “not thinking about pausing.” The bank is trying to lower inflation from 6.1% to its goal of 2%.
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“Monetary policy should continue to tighten and then remain in restrictive territory for some time until inflation expectations are firmly anchored and inflation trends toward target,” Georgieva said.
“We welcome yesterday's decision of the ECB to tighten, we also welcome the communication that surrounded this decision,” she added.
The central bank for the 20 countries that use the euro currency is pressing ahead with rate hikes even as the U.S. Federal Reserve put its series of increases on pause to assess their effect on the economy.
Inflation spiked as Russia's aggression against Ukraine sent energy and grain prices higher. Those factors have since eased, but price pressures have spread as workers demand higher wages to make up for lost purchasing power and businesses raise prices to cover higher costs and ensure profits.
The ECB is raising rates despite the potential impact on economic growth. While higher rates fight inflation by raising the cost of borrowing for purchases or business expansion, which cools off demand for goods, they can also risk slowing the economy too much.
The eurozone economy contracted slightly in the last three months of 2022 and the first three months of this year. Two quarters of contraction is one definition of recession.
However, record low unemployment indicates that the economy still has significant strengths.
Despite the “mild technical recession,” growth should pick up later in the year and “finish the year in positive territory,” said Georgieva, speaking at a news conference in Luxembourg about the IMF’s regular health check of eurozone policies.
She said the economy had shown “remarkable resilience” in lining up new energy supplies after Russia cut off most natural gas deliveries to Europe amid the war in Ukraine.
The IMF’s forecast is 0.8% growth in the eurozone for this year and 1.4% next year.