IMF ‘strongly’ welcomes ECB interest rate cuts

WASHINGTON: The International Monetary Fund hailed the European Central Bank’s unprecedented moves to prevent deflation in the euro zone, including cutting key interest rates to new all-time lows.
“We strongly welcome the very proactive stance taken by the ECB today,” said IMF spokesman Gerry Rice.
“And we’re encouraged that president (Mario) Draghi indicated that the ECB would be willing to do more if necessary.”
After a monetary policy meeting, the ECB announced rate cuts, including a move that puts its deposit rate in uncharted territory at negative 0.10 percent, meaning banks will have to pay the ECB to hold their cash.
The cuts were accompanied by a package of new liquidity measures aimed at boosting bank lending, which has been declining for months.
Backing the decision for the bold moves, the ECB also said it was lowering its inflation forecast for the 18-nation euro zone this year to just 0.7 percent, far below its target.
The IMF had been urging the ECB for months to take action to head off deflation as the fragile recovery in the eurozone spawned weak inflationary pressures.
But ECB chief Draghi previously had brushed away IMF pressure.
“The IMF has been extremely generous in its suggestions on what we should do or not do... We are really thankful for that,” Draghi said in early April.
“But the viewpoints of the (ECB) governing council are in a sense different.”
ECB’s measures were also aimed at easing pressure one the strong euro, which is threatening economic recovery and importing disinflation.
Euro zone inflation has been stuck in what Draghi has called “the danger zone” below 1 percent since October, mainly because of weaker commodity and food prices, but also because of wage and other adjustments in euro zone crisis countries.
The bank stopped short of full-fledged quantitative easing (QE) — printing money to buy assets — but Draghi said more action would come it necessary.
Asked why the ECB had not gone ahead with QE, he said: “We think (what we’ve done is) a significant package. Are we finished? The answer is no. We aren’t finished here. If need be, within our mandate, we aren’t finished here.”
RBS economist Richard Barwell said this comment would fuel market expectations for more action:
“We doubt the knee-jerk response to further bad news will be ‘give the June package more time’; expectations of a broad-based asset purchase program will rapidly start to build,” he said.
Draghi outlined a four-year 400 billion euro ($544.86 billion) scheme giving banks that have been holding back credit due to looming stress tests an incentive to increase lending to businesses in the euro zone.
“Now we are in a completely different world,” Draghi said, citing “low inflation, a weak recovery and weak monetary and credit dynamics.”