IMF says ECB must act if eurozone recovery flags

Paris, Aug 3 | Updated: Aug 4 2005, 05:30am hrs
The International Monetary Fund said on Wednesday that high oil prices and any significant rise in the euro could hurt an expected economic upturn in the euro zone and recommended the European Central Bank (ECB) cut interest rates if needed. The IMF said that its directors felt the ECBs wait-and-see stand on interest rates was appropriate but that many directors on the executive board believed a rate cut would be needed if recovery hopes faded in coming months.

Given the considerable uncertainty surrounding the economic outlook, directors encouraged the ECB to remain vigilant, and to stand ready to respond flexibly, as warranted, the report on the euro zone said. The Washington-based organisation said it expected growth of 1.3 percent in the euro zone this year, which is broadly in line with other official forecasts, and that inflation was likely to remain subdued.

Europe needed to pursue economic reforms and strong, determined leadership was required to tackle the challenges this presented, even if Europes economy was showing signs of recovery due to improving global demand, it said.

Nevertheless, the outlook is uncertain and the risks lie mainly on the downside, including from further sharp increases in oil prices, multilateral euro appreciation in the context of unwinding global imbalances, a reversal in benign global financial conditions, and a potentially sluggish investment recovery in the face of weak business confidence, it said.