Continue interest rate hikes to “kill the beast” of inflation, the European central banks were told by the International Monetary Fund (IMF) on Friday.

“You need to go and kill that beast” the IMF’s European department director Alfred Kammer said in Stockholm.

The European Central Bank (ECB) as well as other other central banks in the region have since last year followed the US Federal Reserve in hiking interest rates to rein in inflation.

Hike rate to bring down inflation

Kammer said “history is littered” with examples that show policymakers who paused rate hikes did so only to “have a second attempt” at bringing down inflation, inflicting more pain of the economy.

He went on to say that that there has been widespread speculation that central banks may pause their hikes as the inflation has been easing and several banks being burdened by higher interest rates.

The collapse of SVB bank last month in the US forced regulators to step in to avoid disruption in the tech sector which it served, while Swiss authorities arranged a hasty takeover of Credit Suisse as confidence eroded, raising worries about the banking sector.

The IMF is of the opinion that central banks should continue to raise interest rates as it fears that surge in energy prices are feeding through to cost increases throughout the economy.

Kammer said for the ECB, which is scheduled to meet next week on interest rates, “that means tightening for longer, and we are estimating until mid-2024. In order to bring inflation down to target sometime in 2025.”

“And there’s no question about it,” said Kammer, especially in Europe where the banking system is well capitalised.

“So our assessment is that this banking system should actually be able to deal with stress coming from” higher interest rates, he added.

The IMF has also asked European countries to reduce their budget deficits. Spending swelled to counter the effect of the pandemic and then further increased to support consumers and industries hit by a jump in energy prices following Russia’s invasion of Ukraine.

Talking about the risks to economic growth, Kammer said European economies have already been operating at “full productive capacity” and labour markets are “super tight”.

Regarding wages, he said that in the eurozone the increases have been modest while profits have risen.

“So there’s a bit of room for wages to increase,” said Kammer.

With inputs from AFP

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