Inflation worries ahead of IMF talks

Fragile eurozone will cause concern at IMF meeting.

Concerns over the eurozone’s fragile economic recovery and low inflation will feature prominently as the world’s finance ministers and central governors congregate in Washington, DC from Thursday until Saturday (10-12 April) for meetings of the International Monetary Fund and the World Bank. An informal meeting of the G20, which gathers together 20 of the world’s largest economies, will take place in the margins.

The IMF’s World Economic Outlook, published twice a year, and most recently on Tuesday (2 April), predicts that growth in advanced economies, including the EU, would improve throughout 2014 and 2015. But it singles out low inflation in the eurozone – estimated by Eurostat at 0.5% in March – as “a key risk to activity” in the region.

“More monetary easing is needed both to increase the prospects that the European Central Bank’s price stability objective of keeping inflation below, but close to, 2% will be achieved and to support demand”, the report says, suggesting further cuts in interest rates and an increase in “longer-term targeted banking funding”. The ECB’s main interest rate stands at a record low of 0.25% since November.

Christine Lagarde, the IMF’s managing director, warned of the danger posed by low inflation in the eurozone on 3 April, and called on the ECB to take further measures to combat low inflation. But the governing board of the ECB, meeting on 4 April, left rates unchanged. Mario Draghi, the president of the ECB, said that inflation was expected to rise again in April, although he revealed that the board had discussed quantitative easing – the injection of money into the economy by a central bank.

A further threat to Europe’s recovery is the escalation of the crisis in Ukraine, according to the IMF, with central and eastern Europe particularly exposed (see pages 10-11 and 20). Growth in the region is expected to weaken in 2013, with “increased geopolitical risks stemming from developments in Ukraine” constituting an appreciable downside risk.

The European Commission will be represented at the G20 and the IMF meeting by Siim Kallas, the European commissioner for transport, who is standing in for Olli Rehn, the European commissioner for economic and monetary affairs and the euro. Rehn has taken leave from the Commission to campaign in the European Parliament elections.

Top of the agenda of the informal G20 meeting will be how to boost global output over the next five years by 2% above current growth trends, a commitment made at the meeting in Sydney in February. This would represent an additional €1.5 trillion of growth for the global economy. Finance ministers are currently exchanging draft plans on what peer- reviewed measures should be taken to achieve the goal.

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