FRANKFURT (MNI) – Interest rates in the Eurozone should remain
exceptionally low given a subdued growth and inflation outlook, the
International Monetary Fund said in its World Economic Outlook released
Wednesday.

The IMF warned that troubles in Greece have exacerbated downside
risks for the single currency bloc since the IMF’s last report published
in October 2009.

“Recovery prospects are still sluggish, and so inflation pressures
remain subdued. Indeed, in advanced Europe, core inflation is projected
to remain low and stable, as inflation expectations are well anchored,”
the report said.

“Hence, in the euro area, it is appropriate to keep interest rates
exceptionally low and to withdraw quantitative measures and unwind
collateral requirement changes very gradually,” the IMF recommended.

This will “help support the recovery in core economies while
facilitating fiscal and real economy adjustments in peripheral
economies,” the report said.

Such adjustments are of the utmost importance, because “large
current account and fiscal imbalances threaten the recovery in some
smaller European countries, with potentially damaging effects on the
rest of the region.”

The debt crisis in Greece and its possible contagion effects have
threatened the normalization of financial market conditions and have
made downside risks to the region’s outlook “more pronounced,” the
report said.

“In the near term, the main risk is that, if unchecked, market
concerns about sovereign liquidity and solvency in Greece could turn
into a full-blown sovereign debt crisis, leading to some contagion,” the
IMF warned.

While resolving fiscal and current account imbalances in peripheral
economies is expected to dampen growth, “delays in taking decisive
policy action could lead to a protracted process punctuated with
occasional crises,” the IMF said.

The report also projected a two-pace recovery in the Eurozone, with
“smaller euro area economies, where growth is constrained by large
fiscal or current account imbalances (Greece, Ireland, Portugal,
Spain),” emerging more slowly from the recession than Germany or France.

— Frankfurt Bureau: +49-69-720 142; email: jtreeck@marketnews.com

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