OECD says central banks must stick to hikes as economy slows

Raises forecasts for 2023 inflation as surge in prices hits people everywhere

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 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 Paris-based organisation said.

The OECD raised forecasts for 2023 inflation compared with its September projections and predicted price increases the following year will remain well above many central bank targets: at 2.6 per cent in the US, 3.4 per cent in the euro area and 3.3 per cent in the UK.

Risks of overshooting

“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, told Bloomberg News in an interview.

“Risks of overshooting are certainly less than risks of inaction,” he added.

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 lowincome countries. Two-thirds of these are already in high debt distress, OECD says.