Euro area could cut rates further, IMF says
WASHINGTON, Dec 21 (Reuters) - European countries preparing to launch a single currency next month could cut interest rates further should the world economic crisis prove to be a larger than expected drag on growth, the IMF said on Monday.
In its World Economic Outlook, the International Monetary Fund said December's cut in borrowing costs by the 11 European states participating in the euro was timely in view of the downturn in the world economy and the need to maintain growth.
''Given the subdued prospects for inflation, the considerable amount of slack, and the more severe implications of downside -- relative to upside -- risks, scope remains for additional interest rate reductions should growth prospects weaken further,'' the IMF report said.
Noting the move to a common European currency was ''proceeding smoothly'', the IMF warned governments in the euro zone to refrain from spending their budgets on trying to boost economic growth in order to cut unemployment lines.
It said such measures could weaken confidence in the euro currency and limit the policy options available for the European Central Bank.
Any increases in public expenditure should be balanced by cuts elsewhere in budgets and governments also needed to reform their economies to curb spending and create room for tax cuts.
''In particular, labor market reforms remain crucial to bring unemployment down on a sustainable basis,'' the IMF said.
Turning to economic prospects in the single currency area, the lending agency said economic growth was slowing due to the global economic downturn and noted several domestic measures of business activity were also less robust.
On the domestic front, the IMF saw risks to the economies of the euro area from possible corrections to inventories in Italy or Germany, a drag on growth from the phasing out of auto incentives in Italy and a general fall in consumer confidence should unemployment start to rise again.
On the external front, it said export growth would be undermined by the recent appreciation of the euro area currencies against the dollar, although this would be offset to some extent by some depreciation against the Japanese yen.
The IMF forecast an average increase in gross domestic product in the currency area of 2.4 percent in 1999 after 2.8 percent this year. Unemployment would fall slightly to 11.2 percent from 11.6 percent this year while the inflation rate would rise to 1.4 percent in 1999 from 1.3 percent.
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