Managing Director Kristalina Georgieva said the International Monetary Fund welcomed the European Central Bank’s quarter-percentage-point rate hike on Thursday, and its chief Christine Lagarde’s pledge that the ECB “does not plan to stop it for the moment”.
The ECB is seeking to bring inflation down from 6.1% to its target of 2%.
“Monetary policy should continue to tighten and then stay in constrained territory for some time until inflation expectations are firmly anchored and on target,” Georgieva said.
She added: “We welcome the tightening decision taken by the European Central Bank yesterday, and we also welcome the contacts that have taken place regarding this decision.”
And the central bank of the twenty countries that use the euro currency is taking the opportunity to raise interest rates, at a time when the US Federal Reserve has temporarily stopped raising interest rates to assess the impact on the economy.
The inflation rate increased after the outbreak of the crisis in Ukraine, which led to higher energy and grain prices. Although the impact of these factors has diminished, price pressures continue, with workers demanding higher wages to compensate for lower purchasing power and companies raising prices to cover higher costs and realize profits.
The European Central Bank is raising interest rates despite the potential impact on economic growth, and while raising interest rates is intended to curb inflation by increasing the cost of borrowing to buy or expand a business, which reduces the demand for goods, it also risks slowing down the economy.
The eurozone economy contracted slightly in the last three months of 2022 and the first three months of this year.
A recession corresponds to two quarters of contraction.
However, the low unemployment rate indicates that the economy still has significant strengths.
Speaking at a press conference in Luxembourg on the regular review of euro zone policies, Georgieva said that despite a “moderate recession”, growth should pick up later in the year and “end the year in positive territory”.
She added that the economy has shown “remarkable resilience” in new energy supplies after Russia halted most natural gas shipments to Europe amid the war in Ukraine.
The International Monetary Fund forecasts growth of 0.8% in the euro zone for this year and 1.4% for next year.
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