The European Central Bank would risk a costly mistake by loosening monetary policy too soon after pausing its unprecedented tightening campaign, according to the International Monetary Fund.
“You have to be vigilant and see disinflation through before you go there,” Helge Berger, a deputy director in the IMF’s European department, told a panel discussion in Brussels. “That said, the world may change, and so we’re very happy that central banks such as the ECB, but also others, have moved to a data-driven approach.”
Berger spoke after the Washington-based lender published a report predicting Europe’s economy will likely have a soft landing, with inflation declining gradually.
ECB officials speaking Wednesday echoed the IMF’s sentiment on policy, with Germany’s Joachim Nagel and Croatia’s Boris Vujcic cautioning that the “last mile” in the fight against inflation will be the hardest. Ireland’s Gabriel Makhlouf said it’s “far too early” to talk about when borrowing costs can be lowered.
Berger said the IMF forecasts were based on the assumption that wages will catch up with price rises across the continent, adding that without this there would be no recovery.
“That’s built on the premise that real incomes will increase that will support consumption that will ultimately generate growth,” he told the event, hosted by the National Bank of Belgium.
Berger warned, however, that “there’s a point where wages grow too fast for inflation to also come down simultaneously by 2025,” when the ECB expects it to return to its 2% goal.
“The message to policymakers is you can have that real wage adjustment, you can have a mild recovery and you can have inflation going down to target by 2025 but be careful to get your macro policies right — both fiscal and monetary policy — but also start looking toward structural policies,” Berger said.
He also urged governments to rebuild fiscal buffers to be ready for the next shock.
--With assistance from Alexander Weber.
(Updates with comments from ECB officials in fourth paragraph. A previous version corrected the quotation in the second paragraph.)