Central banks must beat inflation before cutting interest rates, says OECD
Central banks should be certain they have beaten inflation before cutting interest rates this year, the Organisation for Economic Co-operation and Development (OECD) said despite revisions to its outlook that showed inflation was falling at a faster rate than previously expected.
The Paris-based organisation, which represents 38 countries, said it was “too soon to be sure that underlying price pressures are fully contained”.
It warned that inflation in the UK would persist at the highest level in the G7 this year, forecasting a rate of 2.8%, despite sharp declines in the headline rate in recent months amid cooling global energy prices. The US inflation rate in 2024 would be 2.2%, 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, in a shot across the bows of central banks considering early cuts in the cost of borrowing, it said that while wage demands had “become better balanced”, pay rises “generally remain above rates compatible with medium-term inflation objectives”.
The attacks in the Red Sea, which have disrupted shipping through the Suez Canal, could also trigger a second round of inflationary pressure, it said.
Cormann said continued disruption could add 0.4 percentage points to inflation across the OECD area this year if a doubling in shipping costs was sustained, while there were also risks to inflation from robust growth in workers’ pay, corporate profits or weaker productivity growth.
“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.
The head of the US Federal Reserve, Jerome Powell, said over the weekend that the central bank was alert to the risk of cutting interest rates too soon.
“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 told 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.”
Last week, the Bank of England also played down the likelihood of an early cut to interest rates.
Financial markets still expect Threadneedle Street to push down the interest rate of 5.25% in the UK towards 4% by the end of the year, but Andrew Bailey, the governor, threw cold water on a more aggressive stance, saying: “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 OECD said growth in the global economy was likely to ease to 2.9% in 2024, from 3.1% in 2023, before recovering to 3% in 2025.
Strong US growth will be higher than forecast at 2.1% in 2024. The eurozone will act as a counterweight to the US after its growth rate was downgraded from 0.9% in 2024, at the time of November’s forecast, to 0.6%. The UK’s growth rate for this year was left unchanged at 0.7% and is still expected to recover to 1.2% in 2025.
China is expected to be a significant barrier to global growth as it struggles to cope with high levels of corporate debt and a weak property market, the OECD said.
It said the estimate for China’s GDP growth, which was 5.2% in 2023, was 4.7% this year before dropping to 4.2% in 2025.