The European Central Bank should ease monetary policy to combat dangerously low inflation that could crimp euro zone output and consumer spending, the head of the International Monetary Fund said on Wednesday. ECB policymakers meet on Thursday and are not expected to announce any new measures to fight weakness in Europe's economy. But a drop in the region's rate of inflation is putting pressure on European central bankers to take more action.
"More monetary easing, including through unconventional measures, is needed in the euro area," IMF Managing Director Christine Lagarde said in a speech that outlined the Fund's policy recommendations ahead of its spring meetings in Washington next week. Lagarde said the world's economy should pick up pace above 3 percent this year and next, but she warned the recovery from the global financial crisis remained weak.
She cited slow price growth in the euro zone, geopolitical tensions in places like Ukraine, and market volatility as factors that could drag on growth in the short-term. "In 2013, global growth was about 3 percent; we project modest improvements in 2014 and 2015, although still remaining below past trends," Lagarde said at the Johns Hopkins School of Advanced International Studies.
"The risk is that without sufficient policy ambition, the world could fall into a medium-term low-growth trap," she said. The euro zone's inflation rate fell last month to the its lowest level since November 2009, according to data released on Monday. Prices rose 0.5 percent in the 12 months through March, down from 0.7 percent in the year through February.
Lagarde also urged the Japanese central bank to keep trying to stimulate that country's economy. "The Bank of Japan should also persist with its quantitative easing policy," Lagarde added. She also warned that geopolitical tensions could hit growth if they got out of hand. Russia has been in a stand-off with Western nations over its annexation of the Crimea region, prompting economic sanctions from the United States and the European Union.
"The situation in Ukraine is one which, if not well managed, could have broader spillover implications." Spillovers are also a risk from the US Federal Reserve's gradual winding down of its massive monetary easing program, which has hit emerging markets as investors bet on higher US interest rates. Lagarde reiterated the IMF's calls for greater co-operation among monetary policymakers to limit the impact of the Fed tapering of its monthly bond purchases, as the problem could also "spill back" to the United States.