(Bloomberg) -- The International Monetary Fund struck a cautiously optimistic tone on Europe’s economy, while warning that the longer-term outlook still faces challenges.

“A soft landing for Europe’s economies — bringing inflation back to target with a moderate economic cost in terms of growth — is within reach,” the fund said Friday in a report. “But crosswinds could make it difficult to achieve price stability while securing a lasting recovery.” 

The war in Ukraine — now in its third year — and the subsequent energy crisis seriously impacted Europe’s post-Covid rebound and drove central banks across the region to record tightening.

While some monetary institutions have already started lowering borrowing costs, most interest-rate cuts are yet to come, with the IMF warning on the velocity of such moves.

“The pace of monetary-policy easing needs to match the evolution of underlying inflationary forces,” it said. “In advanced European economies, a gradual, measured pace of easing is preferable under the baseline, ensuring that monetary conditions do not loosen too fast or too slowly. Many CESEE economies will need to maintain a tight stance for longer to fully rein in inflation.”

The fund said that it expects the easing cycle in the euro area and the UK to begin in “mid- to late 2024 and proceed through the end of 2025.”

The IMF recommendation for the European Central Bank is quarter-point cuts in June, September and December, followed by another three moves of that size — in March, June and September — next year “to reach the neutral rate,” said Alfred Kammer, director of the fund’s European department, adding that the ECB “will need to continue having a data-dependent meeting by meeting approach.” 

The IMF also said:

• Europe’s per capita income levels are well behind the global frontier, and this gap isn’t expected to close over the forecast horizon
• Productivity growth has slowed
• Aging is a major drag
• Fiscal support from the crises should be fully withdrawn

©2024 Bloomberg L.P.