The euro crisis continues to weigh down the global economy, the International Monetary Fund said Monday (16 July), putting pressure on the European Central Bank to lower its interest rate even further and issue more cheap loans to the banks.

"There is room for monetary policy in the euro area to ease further. In addition, the ECB should ensure that its monetary support is transmitted effectively across the region and should continue to provide ample liquidity support to banks under sufficiently lenient conditions," the IMF said in its annual World Economic Outlook.

The Washington-based finance outfit cut its global economic growth forecast to 3.9 percent from 4.1 percent in April, mainly due to the continued stress in the eurozone and weaker-than-expected economic activity in emerging countries.

"The utmost priority is to resolve the crisis in the euro area," the IMF said. Overall, the 17 euro countries will contract by 0.3 percent this year and return to a 0.7 percent growth rate next year, the IMF predicts.

The specific reference to the ECB is meant to increase pressure for the Frankfurt-based body to turn on the printing presses via cheap loans, low interest rates and "some form of quantitative easing", meaning direct or indirect bond purchasing aimed at lowering governments' borrowing costs.

The ECB last year bought some Italian and Spanish bonds on the so-called secondary markets where they are traded after being purchased from governments (primary markets). But so far, ECB chief Mario Draghi has ruled out a resumption of this programme.

"What we can expect at the moment is another interest rate cut in September and possibly a further easing of collateral rules for banks (when they seek ECB loans)," ING economist Carsten Brzeski told this website. He said it was not unusual for the IMF to come up with "provocative" ideas which stem from a different central bank culture. Unlike the US Federal Reserve, the ECB is prohibited from buying bonds directly from governments.

German delay

The IMF report praised euro-leaders for their "step in the right direction" at a 28 June summit where they agreed to create a single supervision for eurozone banks and to recapitalise troubled banks directly from the bailout funds, rather than going through governments' balance sheets.

But the German constitutional court has meanwhile announced it will wait until 12 September before ruling on the constitutionality of the new eurozone bailout fund, the European Stability Mechanism, and on the treaty on fiscal discipline signed by 25 EU states. The ESM should have come into being on 9 July, with senior politicians, including from Germany, having warned the court of the potential consequences of a delayed vote.

Delayed or insufficient policy action - a possible reference to the ESM stalemate - is the biggest risk to the global recovery and could further escalate the euro crisis, the IMF said.

“Simply put, the euro periphery countries have to succeed,” IMF chief economist Olivier Blanchard said when presenting the report.