Central banks must ensure they have fully addressed inflation concerns before considering interest rate cuts this year, according to the Organization for Economic Co-operation and Development (OECD). Despite revising its outlook to show a faster-than-expected decline in inflation.
OECD Urges Caution Amid Lingering Inflation Concerns and Wage Pressures
The Paris-based organization, representing 38 countries, stressed that it was 'too soon to ascertain if underlying price pressures are fully contained.
The OECD cautioned that UK inflation is forecasted to remain elevated within the G7 this year, with a projected rate of 2.8%, despite notable declines in the headline rate in recent months due to cooling global energy prices. Additionally, the US inflation rate is expected to be 2.2% this year, revised down from a previous forecast of 2.8%.
“Monetary policy needs to remain prudent, that is restrictive, for some time to come to ensure inflationary pressures are contained,” said Mathias Cormann, the secretary general of the OECD.
However, the OECD cautioned against central banks contemplating premature reductions in borrowing costs. While acknowledging a better balance in wage requests, the OECD noted that wage increases generally exceed rates compatible with medium-term inflation objectives.
OECD Warns of Inflationary Pressures Amid Suez Canal Disruptions
The OECD also noted that the Red Sea attacks, which have caused several disruptions through the Suez Canal, could further exacerbate inflationary pressures.
According to Cormann, ongoing disruptions may result in a 0.4 percentage point inflation increase across the OECD region this year if the doubling in shipping costs persists. Additionally, there are inflationary risks associated with robust growth in workers’ wages, corporate profits, or declining productivity.
“A widening or escalating of the conflict in the Middle East could lead to renewed price pressures and shortages, and a decline in global growth,” he added.
Jerome Powell, the head of the US Federal Reserve, emphasized last weekend that the central bank faces the risk of cutting interest rates prematurely.
“The danger of moving too soon is that the job’s not quite done, and that the really good readings we’ve had for the last six months somehow turn out not to be a true indicator of where inflation’s heading,” he said during the 60 Minutes programme on CBS.
“We don’t think that’s the case. But the prudent thing to do is to just give it some time and see that the data continue to confirm that inflation is moving down to 2% in a sustainable way.”
The Bank of England also downplayed the chance of an early interest rates' cut.
Financial Firms Anticipate UK Interest Rate Drop Amidst Global Economic Outlook
Financial firms are still anticipating Threadneedle Street to reduce the UK's interest rates from 5.25% to around 4% by the end of 2024. However, Governor Andrew Bailey poured cold water on a more aggressive stance, stating: 'We need to see more evidence that inflation is set to fall all the way to the 2% target, and stay there, before we can lower interest rates.
The growth rate of the global economy is projected to decrease to 2.9% this year, down from 3.9% last year, before rebounding next year.
Robust economic expansion in the US is expected to exceed earlier forecasts, reaching 2.1% in 2024. In contrast, the growth outlook for the eurozone has been revised downward from 0.9% to 0.6%, reflecting a divergence from the US performance. The UK's growth rate is projected to remain stable at 0.7% for 2024 and is anticipated to rebound to 1.2% by 2025.
The OECD identifies China as a potential impediment to global economic growth due to challenges arising from substantial corporate debt and a sluggish property market. Projections indicate a decrease in China's GDP growth from 5.2% in 2023 to 4.7% in the current year, with a further decline to 4.2% by 2025.