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“The world’s major central banks mustn’t drop their guard in the fight against inflation as it’s too soon to say if sharp interest rate increases have contained underlying price pressures, the OECD said.
Global economic growth is proving more resilient and inflation in the US and Europe is easing faster than the organization expected in its November outlook. But it warned that factors helping that process, including improvements in supply chains and commodity costs, are dissipating or even reversing.
The OECD also pointed to core inflation above target in most countries and growth in unit labor costs, in addition to risks of the Middle East conflict pushing up shipping and energy costs.
“It is too soon to be sure that the inflationary episode that began in 2021 will end in 2025,” the OECD said on Monday as it published its interim economic forecasts. “Monetary policy needs to remain prudent to ensure that underlying inflationary pressures are durably contained.”
The caution comes as the European Central Bank and the Federal Reserve shift away from aggressive tightening and signal their next moves will be to cut rates. Financial markets have already responded to that and signs of softer headline inflation by betting on more than a percentage point of easing from both institutions by year-end.
But officials on either side of the Atlantic have pushed back against investors expecting that looser policy is just around the corner. On Sunday, Fed chair Jerome Powell said Americans may have to wait beyond March for a cut amid dangers of moving too soon. Last week, ECB President Christine Lagarde said policymakers are still waiting for “critically important” wage data before making a move.
Even when rate cuts do begin, the OECD said central banks will have to move more slowly than they did with the large, rapid hikes that began in 2022. “Scope exists to lower policy interest rates as inflation declines, but the policy stance should remain restrictive in most major economies for some time to come,” the OECD said.”
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