Euro area growth to stay tepid through 2027, inflation to persist: IMF

The Executive Board of the International Monetary Fund (IMF) has concluded its 2025 consultations on euro area policies, urging member countries to adopt a comprehensive strategy to bolster growth and financial resilience. The annual review also incorporated findings from the Financial Sector Assessment Programme (FSAP), which assessed the region’s financial stability and regulatory framework.

Headline inflation is expected to stay around target from mid-2025, with core inflation anticipated to reach 2 per cent by 2026. However, the IMF warned of downside risks to growth, with inflation risks remaining two-sided. It cited potential trade policy shifts, escalating tariffs, and geopolitical shocks as key threats to demand and price stability, IMF said in a press release.

Meanwhile, wage pressures, euro appreciation, and declining non-energy goods prices could pull inflation below projections.

To counter the increasingly complex global backdrop, the IMF called for decisive reforms at the EU level, including steps to deepen the single market, improve energy security, and reorient the EU budget towards common public goods. It also stressed the need to maintain debt sustainability and secure financial and price stability.

The FSAP findings revealed that the euro area’s banking system remains well-capitalised and liquid under current conditions, although some banks could breach capital buffers under stress scenarios. The IMF identified rising risks from interlinkages with non-bank financial institutions and recommended enhanced data sharing, better systemic risk oversight, and comprehensive stress testing.

Further FSAP recommendations included full implementation of the Basel III capital standards, establishment of a common deposit insurance system, more flexible bail-in rules, and stronger resolution liquidity frameworks, added the release.

The IMF welcomed progress in banking supervision and anti-money laundering efforts, but noted persistent fragmentation remains a key obstacle to a more resilient and integrated euro area financial system.

ALCHEMPro News Desk (SG)