Easing monetary policy too quickly in the euro area would be a costly mistake. Helge Berger, Deputy Director of the European Department of the International Monetary Fund (IMF), said this in a panel discussion in Brussels. The European Central Bank (ECB) broke the longest streak of interest rate hikes in its history in October, leaving the base rate at 4.50 percent. The price of money depends on the basic rates, and thus the costs of all kinds of loans, including mortgages.
“You have to be vigilant and see disinflation before you get there,” Berger was quoted as saying by Bloomberg today. Disinflation means a decline in inflation, or a reduction in the rate of price growth. “This means the world can change and we are therefore very happy that central banks such as the ECB and others have moved to a data-driven approach,” Berger added.
Berger was speaking about monetary policy in the eurozone shortly after the IMF released a report suggesting that the European economy is likely to be able to achieve a so-called soft landing, meaning that it will avoid recession despite struggling with inflation. Inflation is steadily moderating and, according to Eurostat’s quick estimate, it fell to 2.9 percent in the euro zone in October. This is the lowest value in more than two years.
For comparison, in the Czech Republic, which is not a member of the eurozone, the inflation rate in September was 6.9 percent. Economists, according to the ČTK poll, nevertheless expect that inflation worsened again in October and its rate rose above eight percent. The Czech National Bank (ČNB) has kept the basic interest rate at seven percent since last summer.
Some ECB officials today expressed a similar view to Berger’s. For example, the heads of central banks in Germany and Croatia Joachim Nagel and Boris Vujcic they warned that the last part of the fight against inflation would be the hardest. According to the head of the Central Bank of Ireland Gabriel Makhlouf it is still too early to talk about when the cost of borrowing can be reduced.
According to Berger, IMF forecasts are based on the assumption that wage growth will catch up with price growth across the continent. According to him, no economic recovery can be expected without this. “This is built on the assumption that real incomes will increase, which will support consumption, which will ultimately lead to growth,” he said in a discussion hosted by the Belgian central bank.
But at the same time, Berger warned that “there is a point where wages are rising too fast for inflation to fall at the same time by 2025.” By that year, the ECB wants inflation back to its two percent target.
“The message for monetary policymakers is that you can get real wages adjusted, you can have a modest recovery and you can get inflation down to the 2025 target, but be careful that you get the right macroeconomic policies — fiscal and monetary,” Berger said. “But also start looking at structural policy,” he added.
At the same time, Berger urged governments to focus on fiscal reserves and be prepared for the next shock.