Central bankers must ensure inflation remains well contained as they bring down borrowing costs, according to a report by chief economist Alvaro Pereira. Global economic growth of 3.3% next year and in 2026 will be aided by easier monetary policy and steady employment growth while fiscal policy likely tightens.
"The global economy remains resilient, with inflation continuing to moderate and global trade starting to revive," the report said. "There are increasing risks related to rising trade tensions and protectionism, a possible escalation of geopolitical conflicts, and challenging fiscal policies in some countries."
Moving interest rates to neutral will help guard against the risk of undershooting inflation targets, the OECD said.
OECD central bank forecasts:
- "In the United States, reductions in the federal funds rate are projected to continue, with rates being lowered to 3.25-3.5% by the first quarter of 2026, when inflation will have largely converged to 2%. Bond holdings are projected to decline further throughout 2025-26, albeit at a slower pace for Treasury securities, as announced in May 2024.
- In the euro area, policy rate reductions are projected to continue this year and the next, lowering the deposit facility rate to 2% towards the end of 2025. The decline in Eurosystem bond holdings is expected to gather speed, with reinvestment of Pandemic Emergency Purchase Programme redemptions being ended as planned from 2025.
- In Japan, the policy rate is projected to increase gradually to 1.5% by the end of 2026, as core inflation stabilises around 2% and a negative output gap closes. The government bond holdings of the Bank of Japan are expected to decline, as the bank’s monthly purchases are reduced by about JPY 400 billion per quarter.
- Reductions in policy rates are projected to continue until mid-2025 in Canada and Korea, and until the first half of 2026 in Australia and the United Kingdom. Central bank bond holdings are assumed to decline further in all these countries other than Korea."
