Central banks must stick with rate hikes as the economy slows, the OECD says

The world’s central banks must keep raising interest rates to combat rising and pervasive inflation even as the global economy slides into a significant slowdown, the OECD said on Tuesday.

The unexpected rise in prices and its impact on real incomes are hurting people everywhere, creating problems that will only get worse if policymakers don’t act, the Paris-based organization said.

The OECD has raised inflation forecasts for 2023 compared to their September forecasts, and projected price increases in the following year will be well above the targets of many central banks: 2.6 percent in the US, 3.4 percent in the euro area and 3. 3 percent in the UK.

“Right now, controlling inflation has to be the top priority, otherwise we could end up in a wage-price spiral like we had in the 1970s, or we could end up with a situation where inflation becomes so entrenched that the… The pain it takes to control them will be great,” the OECD’s interim chief economist Alvaro Santos Pereira told Bloomberg News in an interview.

“The risk of overshooting is certainly less than the risk of inaction,” he added.

The policy prescription comes at a difficult time for the global economy, which is already slowing under the weight of rising energy costs as Russia wages its war in Ukraine. Another risk of higher interest rates is the rising cost of borrowing, particularly for low-income countries. According to the OECD, two thirds of them are already in a high debt crisis.

Still, the organization said some early signs of success in taming prices suggest central banks should remain on a hawkish stance. It highlighted Brazil as a country where a rapid start to rate hikes means inflation has eased in recent months. Recent data also point to some progress in controlling US inflation.

The OECD said that while the global economy will suffer a “significant growth slowdown,” it is not forecasting a recession at this time. In fact, it has revised upwards some of its growth forecasts, notably for the eurozone, where it now forecasts a 0.5 percent expansion in 2023 instead of the 0.3 percent forecast in September.

Pereira said household savings from the pandemic were dampening consumption and fiscal support in Europe had been “quite significant” compared to September’s OECD assessment. However, he warned that it needs to be more targeted to ensure it only protects vulnerable households without further fueling inflation or overburdening public finances.

“In the fight against rising prices, it is also important that fiscal policy works hand in hand with monetary policy,” said Pereira in an introduction to the latest OECD economic survey. “Tax decisions that increase inflationary pressures will lead to even higher policy rates to control inflation.”

https://www.independent.ie/business/world/central-banks-must-stick-to-hikes-as-economy-slows-oecd-says-42163562.html Central banks must stick with rate hikes as the economy slows, the OECD says

Fry Electronics Team

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