IMF urges European central banks to 'kill the beast' of inflation

The International Monetary Fund says raising interest rates is the key to smashing inflationary pressures

The European Central Bank building in Frankfurt, Germany. Reuters

Central bankers in Europe "need to go and kill the beast" of inflation and stay the monetary policy course of raising interest rates to do it, the International Monetary Fund (IMF) said on Friday.

If rate increases are paused, history is littered with examples where "you will need to have a second attempt" at bringing down inflation, inflicting more economic pain, the IMF's European department director Alfred Kammer said.

Mr Kammer's comments came as the IMF released a report that urged European central bankers to be nimble and not to stray from doing what needs to be done to combat inflation, especially if more turmoil emerges from the banking sector as a result of the continuing fallout from the collapse of Silicon Valley Bank (SVB) and the urgent sale of Credit Suisse.

“High and potentially more persistent than expected, underlying inflation calls for tight monetary policy until core inflation is unambiguously on a path back to central bank inflation targets,” the IMF report said.

“Another factor pointing to inflation risks is evidence that economic slack in many European economies may be even smaller than estimated after back-to-back shocks.”

More interest-rate increases

Even the UK, where a recession is likely and consumer-price dangers are lower than they are in the eurozone, the IMF said the Bank of England needs to keep up the pressure on inflation.

“Monetary policy may need some further tightening to keep inflation expectations well anchored and bring inflation back to target, though risks to inflation are now more balanced,” the IMF said.

The IMF’s current outlook for the European Central Bank forecasts 0.75 per cent in interest rate rises to 3.75 per cent.

“Further increases in policy rates are required in the euro area, while central banks in emerging European economies should stand ready to tighten further where real rates are low, labour markets are tight, and underlying inflation persistence is high,” the IMF's report said.