Central banks must resist pressure for early rate cuts, says IMF head
The world’s leading central banks must resist calls from politicians for early interest rate cuts amid concerns over stubbornly high inflation on both sides of the Atlantic, the head of the International Monetary Fund has urged.
Kristalina Georgieva said high inflation across advanced economies was “not fully defeated” and could require a longer wait before reducing borrowing costs.
The IMF managing director alluded to the political pressure that central bank chiefs were likely to face in a pivotal election year, ahead of voters going to the polls in the US, UK and EU.
“On this final stretch, it is doubly important that central banks uphold their independence … Where necessary, policymakers must resist calls for early interest rate cuts,” she said. “Premature easing could see new inflation surprises that may even necessitate a further bout of monetary tightening.”
Speaking before the IMF’s spring meetings in Washington next week, she highlighted a fall in advanced economy headline inflation to 2.3%, from 9.5% 18 months earlier. This trend was expected to continue, Georgieva said, creating the conditions for major central banks to begin cutting rates in the second half of this year.
However, she also cautioned that delaying too long could “pour cold water on economic activity” as she warned the global economy faced a decade of weak growth.
Georgieva said the world was in danger of “a sluggish and disappointing” decade for economic growth without urgent action from policymakers, which she labelled the “tepid twenties”.
Her comments come after a leading Bank of England policymaker warned that any cut to UK interest rates should be “a way off” amid inflationary pressures that would keep the cost of borrowing higher than financial markets expect.
Megan Greene, a member of the Bank’s nine-strong monetary policy committee (MPC), which sets interest rates, said financial markets were betting “in the wrong direction” when they judged how quickly the central bank would make its first rate cut.
A bigger-than-expected increase in US inflation in March to 3.5% surprised markets on Wednesday, pushing back expectations for the first Federal Reserve rate cut to September.
Greene said the markets expected the Fed and the Bank of England to reduce interest rates in tandem, even though the dynamics of the two economies were very different.
Financial markets are betting that the first reduction in UK interest rates from the current level of 5.25% will be in August or September and that there will be at least one further cut this year.
The consumer prices index measure of inflation has fallen steeply in recent months, to 3.4%, raising the prospect that it could drop below the Bank’s target of 2% as early as May.
Many independent economists believe inflationary pressures have reduced significantly, and recent jobs data shows that the labour market has weakened, easing the pressure on employers to increase wages and the prices charged to customers.
On Thursday, the European Central Bank signalled it could decide to cut interest rates as soon as this summer, after a sharp fall in inflation across the 20 member states of the eurozone.
While the bank kept its key rates on hold, its president, Christine Lagarde, said a few policymakers had been ready to cut interest rates, but agreed to support the majority who wanted to wait until their next meeting in June when they had seen more data. Lagarde’s comments were a strong hint that the ECB might bring down rates that month before expected autumn cuts by the Bank of England and Federal Reserve.
By contrast Greene, an American economist who joined the MPC in July, suggested that the Bank of England
would be persuaded to keep rates higher for longer than expected in the UK, where the underlying causes of inflation remain persistent.
She wrote in the Financial Times: “Momentum in the markets has been towards pricing in later rate cuts by the Fed as economic growth remains robust. In my view, rate cuts in the UK should still be a way off as well.”
US inflation fell sharply last year in response to falling energy prices, before rising again in recent months as the economy improved.
The next policy decision by the MPC is due on 9 May.