The European Central Bank has room for further policy rate cuts and should consider offering more cheaper loans to banks to help the economy exit recession, the International Monetary Fund said in a report on Thursday.
The report warned that though collective actions taken by the euro area authorities have addressed important tail risks, the recovery remained "elusive" and the economy faced high risk of prolonged stagnation. According to IMF, more efforts are needed to address the twin challenges of reviving growth and creating jobs.
"Further policy rate cuts, including negative deposit rates, would help support demand and bring inflation back in line with the primary objective," the Washington-based lender said. However, the Fund maintained that the room for cuts was limited.
"Yet reducing the interest rates on the deposit facilities marginally below zero could help anchor expectations of a looser monetary stance and would be a strong form of forward guidance," it added.
The central bank should also consider launching additional unconventional monetary, including extending the Long-Term Refinancing Operation, to help reverse fragmentation.
"To tackle fragmentation and repair monetary transmission more decisively, the ECB should consider further unconventional policies, including through a targeted LTRO (linked to new SME lending), or direct purchase of select private assets," the IMF said.
The lender noted that economic growth has weakened further and unemployment is still rising. The risks of prolonged stagnation and inflation undershooting target are high, while mounting social and political tensions posed an increasing threat to reform momentum, it cautioned.
The Fund forecasts the Eurozone economy to contract 0.6 percent this year before expanding 0.9 percent in 2014. Growth is expected to accelerate to 1.3 percent in 2015.
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