OECD urges central banks to keep raising rates
The OECD urged central banks to “stay the course” and keep raising interest rates despite the turmoil in financial markets, warning that inflation remains the main threat to the global economy.
In an update to its November economic forecasts, prepared in response to rising banking tensions this week, the Paris-based international organization raised its forecast for growth this year to 2.6 percent from 2.2 percent.
This “fragile recovery” was due to falling energy and food prices, China’s easing of coronavirus-related restrictions and rising business confidence.
Alvaro Pereira, OECDthe acting chief economist, said the brighter outlook meant that monetary policy “should remain tight until there are clear signs that underlying inflationary pressures will decline sustainably.”
The OECD’s call for higher interest rates in the US and the eurozone came after the European Central Bank raised the base rate on deposits up 0.5 percentage points to 3 percent on Thursday.
Crash last week Bank of Silicon Valley and Credit Suisse’s need for bailouts on Wednesday led politicians in Frankfurt to signal that further rate hikes would only come if market nerves calmed down.
Interest rate setters at the US Federal Reserve and the Bank of England meet next week, and investors are betting that officials will limit their efforts to curb inflation by raising policy rates.
But Pereira said central banks should not react to the chaos of recent days with less resolve to counter price pressure.
“We are still facing a situation where inflation is the main concern,” he told the Financial Times. “If you look at many parts of the world, inflation has become more widespread.”
He noted that although key rates have come down, core inflation has remained unsustainably high.
The ECB acknowledged on Thursday that core inflation – a measure that excludes food and fuel prices and is seen as the best indicator of continued price pressure – will remain uncomfortably high for much of this year.
Prior to the market panic, high inflation in US services led to expectations that the Fed would raise by half a percentage point next Wednesday. Markets are now expecting a quarter-point increase – or none at all – from the US central bank, with many looking for a cut later this year.
Pereira did not expect interest rates to fall until at least 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 organization said that while inflation is likely to decline “gradually” over this and next year, it is likely to remain above the central bank’s targets until the second half of 2024. Core inflation in advanced G20 economies is projected to average 4 percent in 2023. and 2.5 percent in 2024.
The Russian economy is expected to contract by 2.5 percent in 2023, although this is 3.1 percentage points better than previous OECD forecasts.
The UK has been named the most fragile advanced economy outside of Russia, which is projected to contract by 0.2% in 2023 and grow by 0.9% in 2024. This year’s estimate was in line with the Office of Budget Responsibility’s forecast for the Budget, but the OECD’s forecast for 2024 was significantly more pessimistic than the OBR’s forecast of 1.8 percent growth.
The OECD said that now that energy prices have fallen, governments should cut support to protect households and businesses from rising energy prices. “Some energy support measures are no longer needed,” Pereira said.