MNI: IMF Discourages Fed, ECB Cuts Amid Sticky Core Inflation

Major central banks including the Fed and ECB must hold restrictive interest rates with little progress reducing core inflation seen this year, the IMF said Tuesday.

Core prices will rise 5.1% across advanced economies in 2023, matching last year's gain, according to the Fund’s updated World Economic Outlook. The report boosted the core inflation forecast 0.3pp for this year and 0.4pp to 3.1% next year, compared with the last projections made in April.

"It is critical to avoid easing rates prematurely, that is, until underlying inflation shows clear and sustained signs of cooling," IMF research director Pierre-Olivier Gourinchas wrote in a blog post.

Major central banks are seen raising rates further including a peak of about 5.6% for the Fed and 3.75% for the ECB, before reductions in 2024, according to the IMF report. With restrictive policy making some progress in slowing inflation there is less need for "additional outsized increases in policy rates," the report said. (See: MNI INTERVIEW: Canada Seen Hiking At Least 50BP More-WLU Prof)

Downside growth risks remain prominent amid the Ukraine invasion but the report's tone was less downbeat following the U.S. debt ceiling agreement and the World Health Organization saying the major Covid emergency has wound down. The Fund boosted the 2023 world growth forecast 0.2pp to 3%, with the UK projection raised 0.7pp to 0.4%. U.S. growth is seen 0.2pp higher at 1.8% and China's forecast remained at 5.2%.

Inflation will remain above target this year in 96% of nations with such a goal, and in 89% of those nations next year, the IMF said. Reports of "greed-flation" are overblown because prices often rise faster than wages in overheated economies, the report said, and there's also little evidence of any wage-price spiral.