The OECD has urged central banks to “stay the course” and keep raising interest rates despite the financial market turmoil, warning that inflation remains the biggest threat to the global economy.
In an update to its economic forecasts for November, supplemented as tensions in the banking sector rose this week, the Paris-based international organization raised its growth forecast for this year from 2.2 percent to 2.6 percent.
This “fragile recovery” was driven by falling energy and food prices, the easing of coronavirus restrictions in China and rising business confidence.
Álvaro Pereira, the OECD’s acting chief economist, said the improved outlook means monetary policy “must remain restrictive until there are clear signs of a sustained reduction in underlying inflationary pressures”.
The OECD’s call for higher interest rates in the US and the eurozone came after the European Central Bank raised its benchmark deposit rate by 0.5 percentage point to 3 percent on Thursday.
Last week’s bankruptcy of Silicon Valley Bank and Credit Suisse’s need for a financial lifeline on Wednesday led policymakers in Frankfurt to signal that further rate hikes would only come when market nerves had calmed down.
Rate setters from 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 determination to counter price pressures.
“We still face 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 core inflation remained uncomfortably high while overall rates had fallen.
The ECB acknowledged on Thursday that core inflation — a measure that excludes food and fuel prices and is seen as a better gauge of ongoing 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 increase by the Fed coming Wednesday. Markets are now expecting a quarter-point rise — or none at all — from the US Federal Reserve, and many are pricing in spending cuts later this year.
Pereira did not expect interest rates to fall until 2024 at the earliest, 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 moderate “gradually” this year and next, it is likely to remain above the central bank’s targets until the second half of 2024. Core inflation in the advanced economies of the G20 is expected to reach 2.5 percent in 2023 and 2.5 percent in 2024.
The Russian economy was still expected to contract by 2.5 percent in 2023, although this was 3.1 percentage points better than the OECD’s previous forecasts.
The UK was singled out as the most vulnerable advanced economy, apart from Russia, which is expected to shrink by 0.2 percent in 2023 and grow by 0.9 percent in 2024. This year’s estimate was the same as the UK’s forecast. Office for Budget Responsibility for the Budget, but the OECD forecast for 2024 was significantly more pessimistic than the OBR forecast of 1.8 percent growth.
The OECD said that now that energy prices have fallen, governments should scale back support to protect households and businesses from rising energy prices. “Some energy support measures are no longer necessary,” said Pereira.