OECD asks central banks to continue raising interest rates – 03/17/2023 – Market

OECD asks central banks to continue raising interest rates – 03/17/2023 – Market

The Organization for Economic Cooperation and Development (OECD) urged central banks to “stay the course” and keep raising interest rates despite the turmoil in financial markets, warning that inflation is still the main threat to the world economy.

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

That “fragile recovery” stemmed from declines in energy and food prices, easing of coronavirus restrictions in China and rising business confidence.

Álvaro Pereira, interim chief economist at the OECD, said the brighter outlook meant monetary policy “needs to remain tight until there are clear signs that underlying inflationary pressures are lastingly reduced”.

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

The failure of Silicon Valley Bank last week and Crédit Suisse’s need for a financial bailout on Wednesday (15) led policy makers in Frankfurt to indicate that there would only be further interest rate hikes if the nerves of the market calmed down.

The Federal Reserve and Bank of England rate officials will meet next week, with investors betting that the authorities will rein in their attempts to curb inflation by raising interest rates.

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

“We still face a situation where inflation is the main concern,” he told the Financial Times. “If you look at different parts of the world, inflation has become more widespread.” He noted that while headline rates have fallen, core inflation has remained uncomfortably high.

The ECB acknowledged on Thursday that core inflation — a measure that excludes food and fuel prices and is considered a better indicator of persistent price pressures — will remain uncomfortably high for much of this year.

Before the panic in the market, the high inflation of services in the US led to high expectations of 0.5 points by the Fed next Wednesday (22). Markets are now expecting a 25-point rise — or none — from the US central bank, and many are pricing in reductions later this year.

Pereira did not expect that interest rates could fall until 2024 at the earliest, unless there is a very significant worsening 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 is likely to ease “gradually” this year and next, it is likely to remain above the central bank’s targets through the second half of 2024. Core inflation in advanced G20 economies is projected to be 4% on average in 2023 and 2.5% in 2024.

Russia’s economy is still expected to contract by 2.5% in 2023, although that is 3.1 percentage points better than previous OECD forecasts.

The UK was named as the most fragile advanced economy after Russia, forecast to shrink by 0.2% in 2023 and grow by 0.9% in 2024. The estimate for this year was the same as the forecast by the Office of Budget Responsibility , but the OECD forecast for 2024 was significantly more pessimistic than the office’s growth expectation of 1.8%.

The OECD said that now that energy prices have fallen, governments must reduce the support given to protect households and businesses from increases in this sector. “Some energy support measures are no longer necessary,” said Pereira.

Translated by Luiz Roberto M. Gonçalves

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