IMF Urges ECB to Hold Interest Rates at 2% Amid Diverging Inflation Outlooks
Since June 2024, the European Central Bank (ECB) has adopted a more accommodative monetary policy, cutting interest rates by a total of two percentage points. While this easing has aimed to support economic activity amid moderating inflation, the International Monetary Fund (IMF) has taken a more cautious stance. As markets anticipate further rate cuts later this year, the IMF warns against premature moves and urges the ECB to prioritize price stability amid lingering inflation risks—especially those tied to volatile energy prices.
IMF’s Position: Hold the Line at 2% Speaking at the ECB Forum held in Sintra, Portugal, Alfred Kammer, Director of the IMF’s European Department, called on the ECB to maintain its current deposit rate at 2% unless a significant shock alters the euro area’s inflation outlook.
Kammer stated:
“Inflation risks in the euro area are two-sided. Therefore, we believe the ECB must carry out this delicate task carefully and should not move away from the 2% deposit rate unless there is a fundamental shock that changes inflation expectations. At present, we do not see such a shock.”
This guidance comes at a time when investors are widely expecting at least one more rate cut before the end of 2025, potentially bringing the policy rate down to 1.75%.
Diverging Inflation Forecasts A key area of divergence between the ECB and the IMF lies in inflation projections:
The ECB’s official estimates suggest that inflation will fall below the 2% target starting in the third quarter of 2025, remaining subdued for roughly 18 months, and potentially reaching a low of 1.4% by early 2026.
In contrast, the IMF forecasts inflation at around 1.9% in 2026, slightly above the ECB’s outlook, pointing to persistent pressures—especially from energy markets.
The IMF’s recommendation reflects concerns that inflationary pressures may not be fully subdued and that a hasty shift toward further easing could undermine recent progress in price stability. Holding the policy rate at 2% offers the ECB more flexibility to respond to any unforeseen developments, particularly in a context of ongoing geopolitical uncertainties and energy market volatility.
The caution also signals a broader message: central banks must avoid being overly influenced by market expectations and instead ground their decisions in data and macroeconomic fundamentals.
The IMF’s call for restraint presents a counterweight to growing market optimism around further monetary easing in the eurozone. As inflation trajectories remain uncertain and external risks persist, the ECB faces a delicate balancing act between supporting growth and preserving hard-won disinflation gains. In this context, maintaining the current policy rate may serve as a prudent course until greater clarity emerges.
