By Jan Strupczewski
LUXEMBOURG, June 8 (Reuters) - The European Central Bank should consider the possibility of further cuts to its main refinancing rate, the International Monetary Fund said in a regular report on the euro zone on Monday.
The report also concluded that stimulus moves launched by euro zone governments were sufficient for now, but said there was a lack of "proactive strategy" to shore up the financial system after the sub-prime crisis.
"The benefits of further cuts in the policy rate need to be judged against their possible adverse effects on the functioning of money markets, but it would be useful to explore any margin for further reductions as soon as possible," the IMF said.
The ECB cut its refi rate to a record low of 1 percent last month and announced it would buy 60 billion euros ($83 billion) of corporate bonds to inject more cash into the credit-starved economy amid the worst economic downturn since World War Two.
"The supportive monetary stance now needs to be sustained," the IMF report said.
The bank has not ruled out that it could cut interest rates further, but said its policy stance was appropriate for now.
"Monetary policy should focus on keeping interest rates low by continuing to provide unlimited term funding at fixed rates and at longer maturities as long as disinflationary pressures continue," the IMF said.
"If downside risks were to intensify, a more forceful signal to keep interest rates low would be necessary. To deal with contingencies, all unconventional options, including active credit easing will need to remain under consideration," it said.
Inflation in the euro zone is likely to dip into negative territory for a few months starting in June because of a strong fall in oil prices against last year's highs.
"MISSING ELEMENT"
The IMF said the risk of deflation in the 16 countries sharing the single currency was small, but not unimportant and that inflation expectations remained well anchored.
"Nonetheless, the recent euro appreciation and the large and widening output gaps will depress pricing power. In such an environment, further adverse feedback loops between the financial and the real sector could trigger a protracted deflation," the IMF said.
It said euro zone fiscal policy should remain supportive of the economy into 2010, but that given the large automatic increase in welfare spending, the discretionary measures adopted so far were enough.
It said further stimulus should be reserved for the event that things took a turn for the worse.
The Fund said that there were signs of improvement in the euro zone economy and that the decline in activity should moderate through the remainder of 2009 and give way to a modest recovery starting in the first half of 2010.
But it warned that the recovery was likely to be slow and its shape and timing highly uncertain.
"To secure recovery and a return to self-sustaining growth, policymakers need to take further decisive action, especially in the financial sector," the IMF said.
It noted the euro zone was already spending public money for interventions in the financial system, cutting interest rates and providing discretionary fiscal stimulus.
"A key missing element is a proactive strategy to deal with a weakened financial system, involving a review of capital needs to manage the recession, a cleansing of the financial system of its impaired assets, and a restructuring of weakened institutions," the IMF said.
It also urged the European Union as a whole to fully seize the opportunity of the crisis to overhaul its financial stability arrangements, stressing the need for a quick implementation of the European Commission's reform proposals.
(Editing by Mark John)