Daily Management Review

With Slowing Global Economy, Central Banks Must Maintain Rate Hikes: OECD


With Slowing Global Economy, Central Banks Must Maintain Rate Hikes: OECD
The central banks of various countries need to continue to keep raising interest rates to combat soaring and widespread inflation, even as the global economy slows significantly, according to the OECD on Tuesday.
The unexpected price rise and its impact on real incomes are hurting people all over the world, creating problems that will only worsen if policymakers do nothing, according to the Paris-based organization.
The OECD raised its inflation forecasts for 2023 compared to September projections, and predicted price increases the following year will remain well above many central bank targets: 2.6% in the United States, 3.4% in the eurozone, and 3.3% in the United Kingdom.
“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 over-shooting are certainly less than risks of inaction,” he added.
The policy prescription comes at a difficult time for the global economy, which is already slowing due to rising energy costs as Russia continues its war in Ukraine. Another risk of rising interest rates is an increase in the cost of credit, especially for low-income countries. According to the OECD, two-thirds of these are already in severe debt distress.
Nonetheless, the organization stated that early signs of success in taming prices indicate that central banks should maintain their restrictive stance. It singled out Brazil as a country where a rapid start to rate hikes has resulted in lower inflation in recent months. Recent data also indicates some progress in the fight against US inflation.
While the global economy will experience a "significant growth slowdown," the OECD does not currently predict a recession. Indeed, it revised up some of its growth forecasts, most notably for the eurozone, where it now expects a 0.5% expansion in 2023 rather than the 0.3% it predicted in September.
Pereira stated that pandemic-related household savings are cushioning consumption and that fiscal policy support in Europe has been "fairly significant" in comparison to the OECD's September assessment. He cautioned, however, that it must be better targeted to ensure that it only protects vulnerable households while not further stoking inflation or overburdening public finances.
“In the fight against rising prices, it is also essential that fiscal policy works hand-in-hand with monetary policy,” Pereira said in an introduction to the OECD’s latest economic report. “Fiscal choices that add to inflationary pressures will result in even higher policy rates to control inflation.”