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IMF, ECB Battle Over Rate Hikes

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Even as the International Monetary Fund (IMF) warned Thursday that debt-fighting efforts in the euro zone might require continued availability of low-interest funds from the European Central Bank (ECB), a member of the bank spoke of the need to hike rates.

Reuters reported that the IMF issued its twice-yearly Regional Economic Outlook for Europe, and in it said that reform policies must be aggressive if they were to be effective in preventing debt contagion. It also suggested that the ECB should hold off on raising interest rates so that cash could be readily available to member nations.

In strong language, the IMF pushed for definitive action: "Unrelenting reform efforts at the national level of the crisis-afflicted countries need to be the first line of defense. Contagion to the core euro area, and then onward to emerging Europe, remains a tangible downside risk." The report also called for action on finalizing increases in both the European Financial Stability Facility (EFSF) and its successor rescue facility, the European Stability Mechanism (ESM). It urged, "Commitments have been made to improving lending capacity and pricing under the EFSF. Making those commitments operational by filling in the still-missing specifics is now essential."

Regarding the specter of additional interest rate hikes by the ECB, it commented, "Monetary policy in the euro area can afford to remain relatively accommodative, though normalization lies ahead as economic slack gradually dissipates."

The ECB, however, appears to feel differently about that. Also on Thursday, Juergen Stark, a member of the ECB's six-member board, told the Financial Times, "I think it is a necessity to withdraw—to continue to withdraw—monetary accommodation in order to retain inflation expectations well anchored and to keep inflation under control." He and other board members have been warning about the growing risk of inflation.

On Wednesday, both Belgium's Luc Coene and ECB executive board member Lorenzo Bini Smaghi voiced their concerns about rising inflation in the euro zone. In April it hit 2.8%, well over the ECB target rate of 2%, and the bank is expected to consider it more strongly than the debt crisis when it makes its decision about interest rates. In July it is expected that the ECB will increase rates to 1.5% from their current 1.25% level.

The ECB's policy statement in May did indicate, however, that an interest rate increase in June would be very unlikely, by omitting the phrases that generally signal an imminent increase: "strong vigilance" and "heightened alertness" were both missing from the May statement.


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