The International Monetary Fund warned European countries about underestimating inflation and urged them to keep interest rates stable, after releasing its economic outlook for Europe.
Countries across Europe that are either under the supervision of the European Central Bank or outside the eurozone are starting to loosen up interest rates, as inflation decreases to 2.9% in October after peaking 10.6% in October 2022. The IMF wrote that “a prolonged restrictive stance is still necessary to ensure that inflation moves back to target.”
The IMF European department director Alfred Kammer told journalists while presenting the outlook that on interest rates “it is less costly to be too tight than too loose,” warning against “premature celebration” of reduced inflation.
Usually the inflation is reduced to lower levels after three years, but the IMF is wary of central banks that are not finishing the job to ensure that inflation is taken under control. The ECB halted its rate increases at a meeting on Oct 26 for the first time in more than a year, after raising by 4.5% between July 2022 and September 2023 reaching 4% from -0.5%. Also the Bank of England decided to leave the benchmark rate stable at 5.25%.
The outlook for Europe according to the IMF is for a 1.3% growth in 2023 and 1.5% in 2024 for the whole European Union plus the UK and Switzerland. The eurozone is set to grow 0.7% in 2023 and 1.5% in 2024. An escalation of the war in Ukraine may mean weaker growth, while so far the new conflict between Israel and Palestine has not disrupted European economy, leading to a temporary rise in oil prices.
