IMF expects ECB to raise rates by half a percentage point in 2026

By Jan Strupczewski

WASHINGTON, April 17 (Reuters) - The European Central Bank should lift its key interest rate twice this year to combat an energy-driven inflation surge, but should then reverse these moves in 2027, the International Monetary Fund's European Department chief said on Friday.

"Under our reference scenario, we would expect the ECB to raise rates by about 50 basis points in 2026 in order to maintain a neutral monetary stance," Alfred Kammer, the head of the IMF's European Department, told Reuters.

"Then, in 2027, rates could come down again. If you want to keep the real policy interest rates constant, you would need to increase the nominal policy rate a bit," he said on the sidelines of the IMF and World Bank spring meetings in Washington.

"That is what our models, and we expect the ECB models, would recommend. But we are so uncertain, that I would not emphasize this is our recommendation for the ECB. This is not set in stone. This is just a model-based recommendation, based on where we are today," he said.

The ECB's main interest rate is currently set at 2%.

Kammer said the central bank's response was complicated by the fact that the problem was a shortage of supply, rather than a rise in demand, which would have been much easier to deal with. The closure of the Strait of Hormuz as a result of the U.S.-Israeli war with Iran has reduced global oil and gas supply by a fifth, sending energy prices everywhere soaring, and prompting cuts in economic growth forecasts and higher inflation projections.

"The price shock is going to depress demand and you could be in a scenario where the price shock depresses demand sufficiently that you actually don't need central bank action," Kammer said.

"The ECB is in a much better position (than some other central banks) because inflation expectations are anchored. They have risen, not on a five-year basis, but somewhat on a one-year basis, and that's basically what you then try to compensate with the nominal policy line, this one-year increase in inflation expectations," he said.

"We don't expect inflation expectations are going to de- anchor, but ... you need to be vigilant, because you want to avoid second-round effects," Kammer said. (Reporting by Jan Strupczewski; Editing by Paul Simao)