Central banks must raise rates: OECD
The world’s central banks must keep raising interest rates to fight soaring and pervasive inflation, even as the global economy sinks into a significant slowdown, the Organisation for Economic Co-operation and Development (OECD) said on Tuesday.
The unexpected surge in prices and its impact on real incomes is hurting people everywhere, creating problems that will only worsen if policymakers fail to act, the Parisbased organization said.
The OECD raised forecasts for 2023 inflation compared with its September projections and predicted price rises the following year will remain well above many central bank targets: at 2.6% in the US, 3.4% in the euro area, and 3.3% in the UK.
“Right now controlling inflation has to be the top priority otherwise we might end up with a wage-price spiral like we had in the 1970s, or we end up with a situation that inflation becomes so entrenched that the pain needed to control it will be even greater,” OECD’s interim chief economist, Alvaro Santos Pereira said.
“Risks of over-shooting are certainly less than risks of inaction,” he said.
The policy prescription
comes at a difficult juncture for the world economy, which is already slowing under the burden of surging energy costs as Russia wages its war in Ukraine. Another risk of higher interest rates is the rising cost of credit, particularly for low-income countries. Two-thirds of these are already in high debt distress, according to the OECD.
Still, the organization said some early signs of success in taming prices show that central banks should stay on a restrictive course. It highlighted Brazil as a country where a swift start to rate hikes means inflation has started to ease. Recent data also points to progress in fighting inflation in the US.
The OECD said that while the
global economy will suffer a “significant growth slowdown”, it isn’t currently forecasting a recession. Indeed, it revised up some of its growth predictions, notably for the euro area, where it now sees a 0.5% expansion in 2023 instead of the 0.3% it forecast in September.
Pereira said household savings from the pandemic are cushioning consumption and that fiscal policy support in Europe has been “fairly significant” compared with the OECD’s September assessment. He cautioned that it must be better targeted, however, to ensure it protects only vulnerable households without further stoking inflation or over-burdening public finances.