The European Central Bank (ECB) should not rush to hike interest rates and allow the banking system in the eurozone to repair itself without the hurting the region’s recovery, said the International Monetary Fund (IMF) on Monday.
“In the euro area, remaining financial fragilities could hold back growth, justifying a slower pace of normalization of interest rates,” IMF said. “Moreover, the ECB’s extraordinary measures will need to be removed only gradually as systemic uncertainty recedes.”
The ECB on last Thursday raised the interest rates by 25 points to 1.25 percent, its first rate hike since July 2008.The central bank’s president Jean Claude Trichet last Thursday said that inflation prospects to remain key for further rate hikes. Trichet said the central bank will continue to monitor very closely all developments with respect to upside risks to price stability.
Portugal and Greece may require financial support for some time as they carry out austerity measures, said Olivier Blanchard, chief economist, IMF. They “have to implement structural reforms which are tough to put in place, its going to take a long time to work out.”
EUR/USD slipped off from recent highs in North American trading session on Monday, after IMF said that ECB should not hurry in raising key rates. The EUR/USD fell as low as 1.4421 by 8:48am EST from an overnight high of 1.4484, before trading back to 1.4425 by the close.
European Union (EU) President Herman Van Rompuy on Monday said that “certain risks remain” on the outlook for the eurozone’s economy.
Currency trading was erratic in North American trading session, with relatively thin market conditions showing a slight pullback in risk appetite, leading to modest rise in buying of US dollar, said a note from BNY Mellon.
On the flip side, we are seeing a pick-up in net outflows from the Swedish krona, Australian dollar and Euro, the note said.
BNY Mellon said that global portfolio managers continue to pare their exposure to peripheral Eurozone debt instruments, with net selling being witnessed in Spain, Italy, Ireland and Greece.
Meanwhile, Portuguese bonds have been on the back-foot in recent trading sessions amid ongoing concerns that the quibbling amongst the country’s political parties about the terms and scope of the potential bailout may delay or undermine the rescue package, the bank said.
A delegation from the ECB, IMF and EU is due to visit Lisbon on Tuesday to discuss Portugal’s bailout agreement.