BRUSSELS (Reuters) - European governments should deal with the economic consequences of the war in Ukraine through fiscal policy, to allow monetary policy to normalise in the face of high inflation, the International Monetary Fund said on Friday.
In its regional economic outlook for Europe, the IMF said a protracted war in Ukraine would increase the number of refugees fleeing to Europe, compound supply-chain bottlenecks, add pressures to inflation and deepen output losses.
The biggest risk, it said, was that Russia would suddenly stop supplying oil and gas to Europe, leading to significant output losses especially in central and eastern Europe.
The report said for the whole European Union, a complete stop to all Russian oil and gas imports could mean a loss of 3 percent of GDP in 2023, with individual impact differing with the degree of dependency on Russian imports.
"Fiscal policy is better suited than monetary policy to address the new shocks," the IMF report said.
"Automatic fiscal stabilizers should be allowed to operate freely, while additional spending is allocated for humanitarian support to refugees and for transfers to low-income households and vulnerable, but viable, firms," it said.
Inflation in the 19 countries sharing the euro has reached record highs of 7.4% year-on-year in March, latest data showed, mainly because of soaring prices of oil and gas. The European Central Bank wants to keep inflation at 2% and has signalled it would start tightening policy in July.
"With inflation running far above targets, monetary policy should maintain the course to normalization," the IMF said.
"The pace of withdrawing monetary stimulus should vary with economic circumstances, proceeding faster where inflation expectations risk de-anchoring. Importantly, policymakers should head off the emergence of wage-price spirals," the IMF said.
The IMF forecast earlier this week that, because of the Russian invasion of Ukraine, economic growth in the 19 countries sharing the euro would be 2.8% in 2022, 1.1 percentage points lower than its forecast in January.
Euro zone growth will slow further to 2.3% next year, the IMF forecast, 0.2 points less than projected in January.
(Reporting by Jan Strupczewski)