The European Central Bank may need to cut interest rates further to support growth in the 17-country euro region, which is making progress in taming its debt crisis, International Monetary Fund Managing Director Christine Lagarde said.
“We think that a lot has been achieved,” Lagarde said at a press conference in Washington today. “Yet firewalls have not yet proven operational, progress needs to be made on banking union and, clearly, continued if not further monetary easing will be appropriate in order to sustain demand.”
ECB President Mario Draghi last week indicated that the region was shifting from a financial crisis to an economic-growth crisis as bond yields from Greece to Spain recede from euro-era highs. The central bank kept its benchmark interest rate at 0.75 percent in a unanimous decision a month after calls for a cut from some of its Governing Council.
“We stopped the collapse, we should avoid the relapse and it’s not time to relax,” Lagarde said of challenges for the new year. “Removing uncertainty plays a key role in rejuvenating confidence.”
That includes action in the U.S., where Democrats and Republicans need to work together in the national interest to reach an agreement on raising the debt ceiling, as well as on a plan to reduce debt in the medium term, Lagarde said.
The IMF, which is co-financing bailouts in the euro area with European nations, is continuing talks over a loan to Cyprus, Lagarde said. President Demetris Christofias said this week the delay is due to the government’s differences with the IMF over Cypriot banks’ capital needs.
“The building blocks of a program have been put together,” Lagarde said. “It has not yet been concluded because there are clearly financing issues that need to be resolved in order for a program to be accepted and for debt to be sustainable.”
Lagarde, a former French finance minister who took the IMF helm in July 2011, said competitive currency devaluations are against the principles of the IMF.
Russia warned yesterday that the world is on the brink of a fresh currency war as European policy makers joined Japan in bemoaning the impact of rising exchange rates. European officials from Luxembourg to Norway have also complained about the value of their currency.
“I don’t like any war,” Lagarde said. “There are multiple ways to improve competitiveness other than to use currency as a tool.”
Japan’s 10.3 trillion yen ($115 billion) stimulus package is not appropriate if it doesn’t come with a plan to reduce debt in the medium term, she said.
An inflation target that the Bank of Japan is expected to adopt is a “good and interesting project” if it is “associated with clear independence of the central bank,” she said.
Lagarde also said the IMF board is scheduled to meet Feb. 1 to discuss whether to censure Argentina for not sharing accurate data about inflation and economic growth. Censure has never been declared and is part of a lengthy procedure that can end in expulsion from the IMF.
Separately, the IMF is preparing an assessment of the country’s financial sector, she said. That does not include an annual assessment of its economic policies, which the country has refused to do for several years.