IMF says euro inflation is uncomfortably high, will likely stay high.
The International Monetary Fund said Monday that inflation in the 15 countries that use the euro is "uncomfortably high" and will likely stay above 3 percent in the near future. Inflation close to record highs and well above the European Central Bank's guideline of close to 2 percent -- meaning the bank will likely avoid interest rate cuts until inflation cools.
The IMF does not see the risk of inflation spiraling out of control at present, saying second-round effects -- such as a wage-price spiral that pushes prices up across the economy -- "have essentially been kept in check." Outside of volatile food and fuel prices, so-called core inflation is still moderate at below 2 percent it said, and the overall rate may gradually return to less than 2 percent in late 2009.
In May, yearly inflation again hit 3.6 percent, according to an initial estimate from the European Union's statistical agency Eurostat, the fastest pace of price increases in 12 years. It first rose to 3.6 percent in March before cooling slightly in April.
IMF official Alessandro Leipold told reporters at a Frankfurt news conference that high prices for basic goods would hurt economic growth this year. The euro economy should bounce back from the current "mild slowdown" in late 2009, the fund says, predicting growth of 1.75 percent this year and 1.25 percent next year if financial turmoil does not deepen.
The IMF recommended the ECB keep borrowing costs on hold -- as it has done since last June despite a credit crisis that saw the U.S. Federal Reserve and others slash rates to encourage banks to lend. The fund also warned that the euro zone will see weaker exports as the global economy slows and the euro currency remains high against the U.S. dollar.
The strong euro cushioned Europe from high oil prices last year because oil is priced in dollars, cutting the cost of Europe's import bill. But that effect is fading, Leipold said. "Euro exports have been resilient but not immune and the euro has been a good shock absorber but not impenetrable," Leipold said.
The IMF hinted that the euro may be overvalued, saying the exchange rate is "now on the strong side ... having borne a disproportionate burden of the depreciation of the U.S. dollar."
The International Monetary Fund said Monday that inflation in the 15 countries that use the euro is "uncomfortably high" and will likely stay above 3 percent in the near future. Inflation close to record highs and well above the European Central Bank's guideline of close to 2 percent -- meaning the bank will likely avoid interest rate cuts until inflation cools.
The IMF does not see the risk of inflation spiraling out of control at present, saying second-round effects -- such as a wage-price spiral that pushes prices up across the economy -- "have essentially been kept in check." Outside of volatile food and fuel prices, so-called core inflation is still moderate at below 2 percent it said, and the overall rate may gradually return to less than 2 percent in late 2009.
In May, yearly inflation again hit 3.6 percent, according to an initial estimate from the European Union's statistical agency Eurostat, the fastest pace of price increases in 12 years. It first rose to 3.6 percent in March before cooling slightly in April.
IMF official Alessandro Leipold told reporters at a Frankfurt news conference that high prices for basic goods would hurt economic growth this year. The euro economy should bounce back from the current "mild slowdown" in late 2009, the fund says, predicting growth of 1.75 percent this year and 1.25 percent next year if financial turmoil does not deepen.
The IMF recommended the ECB keep borrowing costs on hold -- as it has done since last June despite a credit crisis that saw the U.S. Federal Reserve and others slash rates to encourage banks to lend. The fund also warned that the euro zone will see weaker exports as the global economy slows and the euro currency remains high against the U.S. dollar.
The strong euro cushioned Europe from high oil prices last year because oil is priced in dollars, cutting the cost of Europe's import bill. But that effect is fading, Leipold said. "Euro exports have been resilient but not immune and the euro has been a good shock absorber but not impenetrable," Leipold said.
The IMF hinted that the euro may be overvalued, saying the exchange rate is "now on the strong side ... having borne a disproportionate burden of the depreciation of the U.S. dollar."
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