BRUSSELS (MNI) – In light of the significant risks facing Europe’s
economic recovery, monetary policy should remain supportive and flexible
and the European Central Bank should redeploy extraordinary measures if
needed, the International Monetary Fund said in a report published on
Wednesday.

“Although the outlook has brightened, significant risks remain,”
the IMF said in its Regional Economic Outlook on Europe, published
Wednesday.

“With financial sector strengthening on its way and little
inflationary pressure on the horizon, monetary policy can and should
remain supportive and flexible,” the report said.

“For example, while the ECB seems comfortable with market forces
bringing overnight rates up closer to the level of the policy rate at
times, it has signalled its intention to keep the policy rate low,” the
report continued.

“Moreover, with the risk balance of the recovery having shifted
downward and fiscal policy options increasingly limited, the ECB should
remain ready to adjust the time horizon of its low-interest-rate policy
and redeploy extraordinary monetary measures if the recovery should
stall unexpectedly,” it said.

The IMF said the UK’s Bank of England “has appropriately maintained
a very expansionary stance and indicated that it will respond flexibly
to incoming data, while paying close attention to the risk that recent
above-target inflation outturns might adversely affect medium term
inflation expectations.”

The report expands on the themes covered by the International
Monetary Fund when it published its World Economic Outlook report
earlier this month.

“Fiscal consolidation, while inevitable, should be undertaken in a
way that minimizes the negative impact on growth,” the IMF report said.

“Monetary policy must steer carefully between the need to normalize
policies on the one hand and the necessity to mitigate sovereign market
volatility and ensure bank liquidity on the other,” it continued, adding
that the “recent check-up of European banks must be followed by rapid
action to eliminate remaining weaknesses in balance sheets while
continuing to safeguard lending capacity.”

The report said the “outlook remains for moderate growth” in
Europe, but that differentials between countries were set to widen. It
also cautioned that by historical standards and, in comparison to other
advanced economies, growth was still weak.

“In part, these growth differentials are due to the lingering
impact of the crisis and the accelerating fiscal adjustment in 2011,”
the report said. “But they also reflect well-known structural rigidities
in the labour, product, and services markets,” it added.

And the report stressed the need for fiscal consolidation, but at a
pace which wouldn’t jeopardise the economic recovery.

It said some European countries could improve the credibility of
their efforts to bring down their debt and deficit levels.

“Although a number of countries have already backed their
adjustment plans by clearly identifying or already adopting measures
beyond the very short term, others have yet to do so, leaving room for
uncertainty about the actual size and nature of the adjustment,” the IMF
report said, without naming specific countries.

–Brussels: 0032 487 (0) 32 803 665; echarlton@marketnews.com

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