OECD calls on central banks to keep raising rates

The OECD has urged central banks to “stay the course” and keep raising interest rates despite the turmoil in financial markets, warning that inflation remains the biggest threat to the global economy.

In an update to its November economic forecast, completed as tensions mounted this week in the banking sector, the Paris-based international body raised its growth outlook this year from 2.2% to 2.6%. .

This “fragile recovery” stems from falling energy and food prices, China’s easing of coronavirus restrictions and growing business confidence.

Álvaro Pereira, the OECD’s acting chief economist, said the improving outlook meant monetary policy “must remain tight until there are clear signs that underlying inflationary pressures are easing. permanently”.

The OECD’s call for higher interest rates in the United States and the eurozone came after the European Central Bank raised its benchmark deposit rate by 0.5 percentage points to 3% THURSDAY.

The failure of Silicon Valley Bank last week and Credit Suisse’s need for a financial lifeline on Wednesday led policymakers in Frankfurt to signal that further rate hikes would only come if market nerves subsided. .

Rate setters at the US Federal Reserve and the Bank of England will meet next week, with investors betting officials will limit their efforts to contain inflation with higher policy rates.

But Pereira said central banks should not react to the chaos of recent days by showing less determination to counter price pressures.

“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 pervasive.”

He noted that even though interest rates had fallen, core inflation 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 indicator of lingering price pressures – would remain uncomfortably high for much of this month. year.

Before the market panic, high services inflation in the United States had led to expectations of a half-point hike by the Fed next Wednesday. Markets now expect a quarter-point hike – or none at all – from the US central bank, with many expecting cuts later this year.

Pereira did not expect interest rates to be able to fall until 2024 at the earliest, barring a very significant deterioration in financial stability. But this was not the main expectation of the OECD. “It’s not 2008,” he said, referring to that year’s global financial crisis.

The organization said that while inflation was likely to moderate “gradually” over this year and next, it was likely to remain above central bank targets until the second half of 2024. in advanced G20 economies is expected to average 4% in 2023 and 2.5% in 2024.

The Russian economy was still expected to contract by 2.5% in 2023, although this is 3.1 percentage points better than in previous OECD forecasts.

The UK has been named the most fragile advanced economy outside of Russia, with a projected contraction of 0.2% in 2023 and growth of 0.9% in 2024. The estimate for this year was the same as the Office for Budget Responsibility’s for the Budget, but the OECD forecast for 2024 was significantly more pessimistic than the OBR forecast of 1.8% growth.

The OECD said that now that energy prices have fallen, governments should reduce support given to protect households and businesses from rising energy prices. “Some energy support measures are no longer needed,” Pereira said.

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