IMF warns ECB credibility at risk over deflation paralysis

The International Monetary Fund has issued a blistering attack on Europe’s authorities for allowing the eurozone to remain stuck in a low-growth trap, warning that they may have to print money with “full conviction” to head off deflation.

“Inflation has been too low for too long. A persistent failure to meet the inflation target could undermine central bank credibility,” said the IMF with remarkable bluntness in its annual health report on the currency bloc.

“A negative external shock could tip the economy into deflation. The recovery is neither robust nor sufficiently strong. Financial markets are still fragmented, with contracting credit and high borrowing costs constraining investment in countries with large output gaps, large debt burdens and high unemployment,” it added.

The fund called for a “large-scale asset purchase programme” if inflation fails to pick up, as well as a concerted push to boost demand, arguing that 70pc of youth unemployment in the eurozone is caused by slump conditions rather than rigid labour markets or lack of skills, as often claimed.

The plea for action came as fresh data showed eurozone industrial output fell by 1.1pc in May, the latest evidence that recovery is close to stalling. The region’s industrial production is still down 12pc from its pre-crisis peak six years ago.

Full article: IMF warns ECB credibility at risk over deflation paralysis (The Telegraph)

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