Central banks should not cut interest rates too early or risk inflation staying above the two per cent target for an extended period of time, the OECD warned today.
In its latest economic outlook, the Paris-based organisation cautioned that “it is too soon to be sure that underlying price pressures are fully contained”.
The OECD warned that labour costs remain too high to be compatible with inflation returning to target on a sustainable basis.
According to the OECD’s forecasts, inflation in the UK is expected to average 2.7 per cent in 2024 before falling to 2.4 per cent next year. In the eurozone meanwhile, inflation will average 2.6 per cent this year and 2.2 per cent next.
“Monetary policy needs to remain prudent to ensure that underlying inflationary pressures are
durably contained,” it said.
“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 warning comes shortly after central banks in the US, UK and eurozone suggested that markets would have to wait longer for rate cuts to begin.
Investors had piled on bets that central banks around the world would start unwinding their historic bout of monetary tightening in the first half of this year. However, central bankers have pushed back slightly against market expectations.
Speaking last week, Andrew Bailey, governor of the Bank of England, recognised that there had been “good news” on inflation but said policymakers needed “more evidence” that inflation was falling sustainably to target before cutting interest rates.
The OECD also flagged “mounting fiscal challenges” stemming from rising debt burdens and future spending pressures.
“Stronger near-term efforts to contain spending growth and well-designed medium-term fiscal frameworks are needed to help ensure sustainability and provide flexibility to respond to future shocks,” it said.
Last week the International Monetary Fund “advised the UK against further tax cuts,” suggesting more attention needed to be paid to public services.
There was no change to the UK’s growth forecasts for the coming year compared to the OECD’s November forecasts. Growth in the UK is forecast to be 0.7 per cent in 2024, putting it slightly ahead of the eurozone but comfortably behind the US.
Next year, growth will pick up to 1.2 per cent as real incomes strengthen.