ISTANBUL, Oct 3 (Reuters) - The euro zone will return to
weak growth next year, the International Monetary Fund forecast
on Saturday, urging a withdrawal of fiscal and monetary stimulus
only when recovery takes hold.
In a twice-a-year report, the fund said the economy of the
16 countries using the euro would grow 0.3 percent in 2010 after
an expected contraction of 4.2 percent this year.
"While the worst of the recession may be past, the
recovery is far from solid, and policymakers cannot
afford to drop their guard," the IMF said.
"Monetary and fiscal policy need to move carefully to
sustain the upswing while preparing to disengage from the
extraordinary measures put in place during the crisis," it said.
The IMF stressed the need to bring the financial sector back
to full health to help the recovery.
"To prevent a lengthy spell of below-potential growth, the
financial system needs to be restored to health as soon as
possible," it said, urging fast recapitalisation of financial
institutions where needed.
The withdrawal of fiscal stimulus should be coordinated
between European countries, the IMF said, but noted that
countries whose public finances are in bad shape should
consolidate more urgently than others.
"Given the impact of the crisis on public finances, fiscal
policy should err on the side of caution and start the
necessary consolidation as soon as the state of the cycle
allows," the IMF said.
The Fund expects the aggregate euro zone budget deficit in
2009 to be 6.2 percent of gross domestic product, rising to 6.6
percent in 2010.
The economies of most euro zone countries would grow next
year, with the exception of Greece, Luxembourg, Ireland and
Spain, which the IMF expects will continue contracting in 2010.
Outside the euro zone, the output of Hungary, Latvia,
Estonia, Lithuania and Bulgaria will also continue to shrink in
2010.
On monetary policy, the report said interest rates should
remain low for now to support economic activity and that the
European Central Bank and other central banks in Europe should
stay open to all policy options.
"Some central banks (including the ECB and a number of
emerging market central banks) still have additional room for
manoeuvre," the report said.
The ECB's main rate is at a record low of 1 percent now.
Economists expect it to start raising rates from the third
quarter of 2010. []
But the IMF said that apart from having low interest rates,
the ECB should also tell markets it intends to keep them low for
a while, rather than keep them guessing, to boost credit.
"In addition, even more forceful signals that interest rates
will be kept at very low levels for some time and further
extension of nonstandard measures may be called for," it said.
It forecast euro zone inflation would be 0.3 this year and
0.8 percent in 2010 -- well below the ECB price stability target
of just below 2 percent.
(Reporting by Jan Strupczewski, Editing by Ruth Pitchford)
