IMF: Emerging European economies need high interest rates for longer

Budapest, Hungary.
Budapest, Hungary. Copyright Canva.
By Eleanor Butler
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Inflation is proving more stubborn in central, eastern and southeastern Europe, says the International Monetary Fund, meaning a soft landing must be handled carefully.

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Europe's post-pandemic recovery is outperforming dismal predictions but progress is uneven across the region, claimed Alfred Kammer, European Department Director at the International Monetary Fund (IMF).

Speaking at a Croatian economics forum on Friday, he explained that Europe's inflation crisis can be tackled without provoking a recession, what's known as a soft landing.

Kammer nonetheless added that a cautious monetary policy is needed, in some nations more than others.

"Core inflation, a measure of underlying price dynamics which excludes volatile food and energy price components, is higher in emerging European economies than in advanced European economies," he said.

In particular, Kammer noted that the inflation rate was coming down more slowly in Romania, Moldova, Montenegro, Hungary, and Serbia, compared with other nations in central, eastern and southeastern Europe (CESEE).

In light of this, he added, central banks shouldn't be too quick to lower rates.

Markets are currently expecting the ECB to move in June, and non-eurozone neighbours Hungary, Poland, and the Czech Republic have already slashed borrowing costs.

Manoeuvring a soft landing is a delicate balancing act as, if rates stay high for too long, they can significantly hamper economic activity. Conversely, if rates are cut prematurely, there is a risk that inflation could rebound, with wage growth sitting above productivity growth.

The IMF expects growth in the overall euro area to rise from below 1% this year to 1.7% in 2025.

Predictions are more dramatic in the CESEE area, with growth forecast at around 3% this year, and 3.5% for 2024.

"Achieving a soft landing will not be easy, but it is critical," said Kammer, "because it will help policymakers getting ready for what will be an even more difficult task ahead: raising CESEE's growth prospects in a durable manner."

Even prior to the Covid-19 pandemic, European economies were lagging behind global counterparts in terms of growth.

One of the key challenges facing the region is a low productivity rate which, the IMF claims, can be tackled by increasing investment in infrastructure, technology, and education.

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