The OECD has urged central banks to “stay the course” and continue raising interest rates despite turmoil in financial markets, warning that inflation remains a key threat to the world economy.
In an update to its November economic forecast completed this week amid rising tensions in the banking sector, the Paris-based international body upgraded its forecast for growth this year from 2.2 percent to 2.6 percent.
This “fragile recovery” stems from lower energy and food prices, China’s coronavirus restrictions and rising business confidence.
Alvaro Pereira, the OECD’s acting chief economist, said the rosy outlook meant “monetary policy needs to remain restrained until there are clear signs that underlying inflationary pressures are sustainably contained”.
The OECD’s call for higher interest rates in the US and eurozone came after the European Central Bank raised its benchmark deposit rate by 0.5 percent to 3 percent on Thursday.
The failure of Silicon Valley Bank last week and Credit Suisse’s need for a financial lifeline on Wednesday prompted policymakers in Frankfurt to signal further rate hikes only if market nerves calmed down.
Rate-setters from the US Federal Reserve and the Bank of England meet next week, with investors betting that officials will rein in their efforts to tame inflation with higher policy rates.
But Pereira said central banks should not respond to the chaos of recent days by showing less determination to deal with price pressures.
“We are still facing a situation where inflation is the main concern,” he told the Financial Times. “If you look in many parts of the world, inflation has become more widespread.”
He noted that while headline rates have come down, core inflation has remained uncomfortably high.
The ECB acknowledged on Thursday that core inflation – a measure that excludes food and fuel prices and is seen as a better gauge of the persistence of price pressures – will remain uncomfortably high for much of this year.
Before the market panic, the Fed was expected to hike by half a point next Wednesday due to higher services inflation in the US. Markets now expect a quarter-point hike by the US central bank – or none at all – and many are pricing in a cut later this year.
Pereira did not expect interest rates to drop as early as 2024, unless there was a very significant deterioration in financial stability. But this was not the main expectation of the OECD. “This is not 2008,” he said, referring to that year’s global financial crisis.
The institute said that while inflation is likely to moderate “gradually” this year and next, it is likely to remain above the central bank’s targets through the second half of 2024. Core inflation among the G20 advanced economies is projected to average 4 percent. 2.5 percent in 2023 and 2024.
Russia’s economy was still expected to contract by 2.5 percent in 2023, although this was better than the OECD’s previous forecast of 3.1 percent.
The UK was identified as the most fragile advanced economy apart from Russia, forecast to contract by 0.2 per cent in 2023 and grow by 0.9 per cent in 2024. This year’s estimate was similar to the Office for Budget Responsibility’s forecast. Budget, but the OECD’s 2024 forecast was significantly more pessimistic than the OBR’s expectation of 1.8 per cent growth.
The OECD said that now that energy prices have fallen, governments should scale back support to protect households and companies from rising energy prices. “Some energy support measures are no longer needed,” Pereira said.
