IMF warns on low inflation, calls on ECB to act

WASHINGTON Wed Apr 2, 2014 2:22pm EDT

Christine Lagarde, Managing Director of the International Monetary Fund (IMF) smiles during a session at the annual meeting of the World Economic Forum (WEF) in Davos January 23, 2014. REUTERS/Ruben Sprich

Christine Lagarde, Managing Director of the International Monetary Fund (IMF) smiles during a session at the annual meeting of the World Economic Forum (WEF) in Davos January 23, 2014.

Credit: Reuters/Ruben Sprich

WASHINGTON (Reuters) - The head of the International Monetary Fund on Wednesday called on the European Central Bank to ease monetary policy to move prices higher, saying "low-flation" in advanced economies risked undercutting an already sluggish global recovery.

IMF Managing Director Christine Lagarde said the world's economy should pick up pace to grow more than 3 percent this year and next. But she said risks, including low inflation in the euro zone, geopolitical tension in places like Ukraine, and market volatility, could prompt a prolonged period of sluggish growth.

ECB policymakers meet on Thursday and are not expected to announce any new measures to fight weakness in the euro zone economy, despite pressure to act to reverse a drop in the region's rate of inflation.

"More monetary easing, including through unconventional measures, is needed in the euro area," Lagarde said in a speech that outlined the Fund's policy recommendations ahead of its spring meetings in Washington next week.

The IMF has argued that highly indebted euro zone countries face a harder task to reduce debts, regain competitiveness and tackle high unemployment with inflation well below the ECB's target of close to 2 percent.

Annual price growth in the currency bloc ticked down to 0.5 percent in March, its lowest since 2009, and its sixth month in what ECB President Mario Draghi has called "the danger zone" below 1 percent.

Lagarde also urged the Japanese central bank to keep trying to stimulate that country's economy.

"In 2013, global growth was about 3 percent; we project modest improvements in 2014 and 2015, although still remaining below past trends," Lagarde said at the Johns Hopkins School of Advanced International Studies.

"The risk is that without sufficient policy ambition, the world could fall into a medium-term low-growth trap," she said.

She warned that geopolitical tensions could hit growth if they got out of hand. Russia has been in a stand-off with Western nations over its annexation of the Crimea region, prompting economic sanctions from the United States and the European Union.

"The situation in Ukraine is one which, if not well managed, could have broader spillover implications," Lagarde said

"Now our hope for the (IMF) program for Ukraine to work ... is that geopolitical tensions go away, come down, so that that country and its people can actually recover," she said.

The IMF last week announced a $14 billion to $18 billion credit line for Kiev in exchange for tough economic reforms that would unlock further aid from the EU, United States and other lenders.

Spillovers are also a risk from the U.S. Federal Reserve's gradual winding down of its massive monetary easing program, which has hit emerging markets as investors bet on higher U.S. interest rates.

Lagarde reiterated the IMF's calls for greater cooperation among monetary policymakers to limit the impact of the Fed tapering of its monthly bond purchases, as the problem could also "spill back" to the United States.

(Additional reporting by Jason Lange; Editing by Chizu Nomiyama and Paul Simao and Andrea Ricci)

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