The International Monetary Fund has indicated that the European Central Bank will likely need to raise borrowing costs again, just hours after the ECB implemented a 25-basis-point rate hike.
In a report summarizing its annual assessment of eurozone-level policies released on Thursday, IMF staff stated that policy rates will need to increase to contain the inflationary impact of economic shocks.
The IMF's outlook is based on an assumption of a cumulative 50 basis points of rate increases this year, in response to projections that both headline and core inflation will remain above the 2% target through 2028. The report revised its forecast for consumer price increases in 2026 upward to 2.8% from the 2.4% predicted in April.
The IMF noted that if incoming data aligns with its baseline forecast, a policy stance slightly more restrictive than currently assumed may be required. This would be necessary to keep medium-term inflation expectations firmly anchored, prevent a broad-based increase in prices stemming from energy cost shocks, and ensure a more timely return of inflation to its target.
The Washington-based institution emphasized that if energy prices and inflation expectations rise more than projected in the baseline scenario, it could necessitate a "faster and/or larger tightening" of monetary policy.
This assessment follows the ECB's widely anticipated rate hike under the leadership of President Christine Lagarde, who previously served as the IMF's Managing Director.
In its report, the IMF acknowledged that weaker economic growth could alter this outlook. It revised its eurozone growth forecast for 2026 down to 0.9%, aligning with the ECB's March projection and lower than the IMF's previous forecast of 1.1%.
Eurozone finance ministers, meeting in Luxembourg on Thursday, discussed the conclusions of the IMF report. The report criticized euro area governments for providing aid to households and businesses to cushion the energy shock caused by the conflict in Ukraine, stating that "broad-based fiscal support is not necessary."
The IMF reiterated its longstanding position that any response measures should be temporary, targeted, and preserve price signals. It added that "many member states have introduced temporary but untargeted energy support measures."
The IMF warned that, while these measures have been limited in scale so far, they could weaken incentives to save energy and create adverse spillover effects for other fuel importers. The report cautioned that this could "increase the need for further monetary policy action to maintain price stability," in addition to placing further strain on public finances.
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