IMF favors restrictive economic policies in the European Union

June 16 (UPI) -- Economic policies in the European Union should remain restrictive enough to control consumer-level inflation, the head of the IMF said a day after the European Central Bank hiked rates.

"Inflation has started to decline from historically high levels, but is still well above target," International Monetary Fund President Kristalina Georgieva said. "And, uncertainty remains elevated, with risks are skewed to the downside for growth and to the upside for inflation."

Inflation in the EU topped 10% last year, but is moderating. Staff at the European Central Bank expect inflation to average 5.4% this year and drop to 2.2% by 2025. The 2025 forecast, however, is still above the 2% rate favored by the ECB.

Global markets last year struggled under the supply-chain issues from pent-up demand during the pandemic, leading to elevated prices. That situation was compounded further by the Russian invasion of Ukraine last February as sanctions pressures mounted on the Kremlin.

Georgieva said Europe's economy was decidedly resilient in the wake of the invasion, but the economy remains under pressure, slipping into "mild technical recession" early this year.

Gross domestic product in the eurozone contracted by 0.1% during both the fourth quarter of 2022 and the first quarter of 2023.

The ECB said the outlook for both inflation and growth was uncertain, with downside risks still coming from pressures from what the bank said was "Russia's unjustified war against Ukraine and an increase in broader geopolitical tensions, which could fragment global trade and thus weigh on the euro area economy."

The bank Thursday opted for a rate increase of 25 basis points after bank President Christine Lagarde projected that inflation will remain entrenched in the regional economy.

That decision was praised by Georgieva during comments on Friday.

"Monetary policy should continue to tighten and then remain in restrictive territory for a period, to keep inflation expectations firmly anchored," she said.