OECD calls on central banks to keep raising rates

The OECD has urged central banks to “stay the course” and continue raising interest rates despite turmoil in financial markets, warning that inflation was still the main threat to the world economy.

In an update to its November economic forecasts, completed as tensions mounted this week in the banking sector, the Paris-based international organisation upgraded its outlook for growth this year from 2.2 per cent to 2.6 per cent.

This “fragile recovery” stemmed from falls in energy and food prices, China’s loosening of coronavirus restrictions and rising business confidence.

Álvaro Pereira, the OECD’s acting chief economist, said the brighter outlook meant monetary policy “needs to remain restrictive until there are clear signs that underlying inflationary pressures are lowered durably”.

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 percentage points to 3 per cent on Thursday.

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

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

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

“We still face a situation where inflation is the main worry,” he told the Financial Times. “If you look at many parts of the world, inflation has become more pervasive.”

He noted while headline rates had come down, core inflation remained uncomfortably high.

The ECB on Thursday acknowledged core inflation — a measure that excludes food and fuel prices and is seen as a better gauge of the persistence of price pressures — would remain uncomfortably high for much of this year.

Before the market panic, high services inflation in the US had led to expectations of a half-point rise by the Fed next Wednesday. Markets now expect a quarter-point rise — or none at all — by the US central bank, and many are pricing in cuts later this year.

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

The organisation said while inflation was likely to moderate “gradually” over this and next year, it was likely to remain higher than central bank targets until the second half of 2024. Core inflation in the G20 advanced economies was projected to average 4 per cent in 2023 and 2.5 per cent in 2024.

Russia’s economy was still expected to contract by 2.5 per cent in 2023, although this was 3.1 percentage points better than in the OECD’s previous forecasts.

The UK was singled out as the most fragile advanced economy apart from Russia, forecast to shrink by 0.2 per cent in 2023 and grow by 0.9 per cent in 2024. The estimate for this year was the same as the Office for Budget Responsibility’s forecast for the 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 now that energy prices had fallen, governments should scale back the support given to protect households and companies from rising energy prices. “Some energy support measures are not needed any more,” Pereira said.

Source: Economy -

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