ECB should cut rates, allow higher inflation: Lagarde

DUBLIN Fri Mar 8, 2013 7:37am EST

Christine Lagarde (L) chief of the International Monetary Fund (IMF) attends the annual meeting of the World Economic Forum (WEF) in Davos January 26, 2013. REUTERS/Pascal Lauener

Christine Lagarde (L) chief of the International Monetary Fund (IMF) attends the annual meeting of the World Economic Forum (WEF) in Davos January 26, 2013.

Credit: Reuters/Pascal Lauener

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DUBLIN (Reuters) - The euro zone may need higher inflation in countries like Germany and lower interest rates across the bloc to ensure a sustained economic recovery brings palpable benefits, the head of the IMF said on Friday.

Speaking during a visit to bailed-out Ireland, Christine Lagarde said while Europe had come a long way since last summer and financial anxieties have eased somewhat, more needed to be done to deal with "depressingly familiar" underlying issues.

Reiterating a call in January for the European Central Bank to keep its monetary policy easy, the former French finance minister said there was room for a further cut after Frankfurt kept rates at 0.75 percent this week.

"Monetary policy should remain accommodative, and we believe that there is still some limited room for the ECB to cut rates further," Lagarde said in remarks prepared for a speech delivered in front of an audience that included Ireland's representative on the ECB governing council, Patrick Honohan.

"Restoring a sense of balance means lower inflation and wage growth in the south (of the euro zone), but it also might mean allowing somewhat higher inflation and wage growth in countries like Germany. This too is an aspect of pan European solidarity."

Lagarde, who has urged countries to press forward with fiscal and reform promises, said on Friday that the pace of such adjustments was crucial and the right balance was needed between putting the books in order and supporting the recovery.

The International Monetary Fund chief said European leaders may need to focus less on headline deficit reduction targets to avoid undermining economic growth and help their recession-hit people as well as seeking to reassure financial markets.

"Improving sentiment is not translating into higher jobs or incomes. It might be helping markets, but it is not yet helping people," she said.

(Reporting by Padraic Halpin and Conor Humphries; Editing by Ruth Pitchford)

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