European central banks must “kill the beast” of inflation, without being tempted to take a “pause” in their interest rate hikes, said Friday the director of the International Monetary Fund (IMF) for Europe. “We have to go and kill this beast. If you potentially start taking a break, throwing a party prematurely, history is full of examples where you need a second try to rein in inflation and you do damage to the economy a second time,” pleaded Alfred Kammer, during a press briefing on the European economy organized in Stockholm.
To control a global inflationary wave, but particularly strong in the United States and Europe, Western central banks have raised their interest rates considerably since last year, causing a slowdown in the global economy and concerns for the banking sector. At a time when inflation is slowing on both sides of the Atlantic, the IMF calls, however, for continued efforts to contain the surge in prices as a priority.
For the European Central Bank (ECB), which has already raised its interest rates to their highest level since October 2008, in a range of 3% to 3.75%, this should translate into “more” rate hikes for “longer,” said Alfred Kammer. This policy of monetary tightening by the ECB must last “until mid-2024, in order to bring inflation back to its target (of 2%, editor’s note) somewhere in 2025”, according to the German economist. For the IMF, the need to slow inflation takes precedence over concerns about the banking and financial system, which it believes can withstand the strains. “And there is no debate on that,” said Alfred Kammer. “We believe the banking system needs to be able to handle the stress from that side,” he said.
Despite the concerns caused by the recent failures of the American bank SVB or the Swiss giant Crédit Suisse, “in Europe, we have a healthy, well-capitalised, highly regulated and well-monitored banking system”, justified the IMF official. In addition to the efforts of central banks, the Fund is also calling on European countries to reduce their budget deficits and the size of their inflation support measures to accompany the movement.
Asked about the risks to growth, Alfred Kammer stressed that unemployment remained low in Europe and that the European economy “was at full capacity”. As for wages, so far there has been no runaway observed with the rise in prices. “So far, we have seen rather moderate increases (…) and there is a little room for wage increases,” said the economist.
