(Bloomberg) — The Federal Reserve and the European Central Bank must press ahead with interest-rate increases and not be blown off course by the fragility of the global economic recovery and vulnerabilities in the financial system, the OECD said.
(Bloomberg) — The Federal Reserve and the European Central Bank must press ahead with interest-rate increases and not be blown off course by the fragility of the global economic recovery and vulnerabilities in the financial system, the OECD said.
In its latest assessment of the world economy, the Paris-based organization in some ways painted a rosier picture of the challenges policymakers need to navigate. It raised its global growth forecast for this year to 2.6% from 2.2% in November and predicted weaker headline inflation in many countries.
It cautioned that the pace of global economic expansion will remain below trend in 2023 and 2024, however, with risks tilted to the downside. Crucially, price pressures are more intense than previously expected, driven by rising costs in services, high profits in some sectors and tight labor markets.
“Monetary policy needs to remain restrictive until there are clear signs that underlying inflationary pressures are lowered durably,” the OECD said in its interim outlook on Friday. “Further interest-rate increases are still needed in many economies, including the United States and the euro area.”
The OECD’s revised forecasts for growth and inflation include:
- Global growth forecasts raised to 2.6% from 2.2% for 2023, to 2.9% from 2.7% for 2024
- Headline inflation 2023 prediction for G-20 cut to 5.9% from 6%, core inflation for G-20 advanced economies raised to 4% from 3.8%
- Sees US 2023 GDP 1.5% vs 0.5% in November, raises core inflation forecast to 3.9% from 3.6%
- Sees euro area 2023 GDP 0.8% vs 0.5% in November, raises core inflation forecast to 5.2% vs 4.7%
The prescription from the 39-member economic-policy club underscores how the world’s battle with surging prices is far from over. That’s despite concerns that rapid tightening by central banks has contributed to the collapse of Silicon Valley Bank and the crisis of confidence in Credit Suisse.
On Thursday, the ECB signaled it’s on the same page when it stuck to plans to raise interest rates by 50 basis points, undeterred by market volatility in recent days. The Fed’s next rate decision is due on March 22.
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Still, the OECD also said central banks should exercise caution as the full impact of high rates is hard to gauge, could hit the economy more than expected, and may reveal risks in the models of some financial institutions.
Governments must also contribute to combating inflation by ensuring fiscal policies to mitigate the energy crisis are focused only on those in need. For now, however, an overwhelming proportion of the spending has been too broad, the organization said.
“Better targeting and a timely reduction in overall support would help to ensure fiscal sustainability, preserve incentives to lower energy use, and limit additional demand stimulus at a time of high inflation,” the OECD said.
–With assistance from Jane Pong.
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