Fiscal policy should also avoid adding to inflation problem, OECD says.
Central banks need to keep tightening through 2023 to get inflation back under control and only in 2024 will some including the Fed provide relief to assist a rebound in economic growth, the OECD said Tuesday.
"This strategy is starting to pay off," according to a revised global economic outlook from the Paris-based group led by interim chief economist Alvaro Santos Pereira.
"Continued monetary policy tightening is needed in most major advanced economies to anchor inflation expectations and lower inflation durably," the OECD said. "Persistent inflation pressures are also likely to prompt further monetary policy tightening in many emerging-market economies, and limit the scope for any easing in countries where growth is slowing and interest rates have already been raised substantially."
The OECD mostly affirmed its earlier prediction for global economic growth of 3.1% this year, 2.2% next year and added a 2024 projection for 2.7%, saying the Ukraine war and tighter financial conditions are important downside risks. Asia will account for the majority of growth, which will remain limited in North and South America and Europe.
Headline consumer price inflation in the major advanced economies is projected to moderate from 6.3% this year to around 4.25% in 2023 and 2.5% per cent in 2024, the OECD said.
That will open up space for two "modest" Fed rate cuts in 2024 after hiking to 5%-5.25% early next year, the OECD said. China's central bank will hold rates through 2024 though it could take measures to stabilize its currency.
The ECB's main refinancing rate will reach 4.25% by the second quarter of 2023 and stay there until the end of 2024. "Maturing securities are expected to be fully reinvested over the projection horizon, with use being made of all margins of flexibility when reinvesting the proceeds of maturing bonds on the ECB balance sheet to limit financial fragmentation," the OECD said.
The BOE is seen raising its policy rate to 4.5% by mid-2023 and holding through 2024 while the Bank of Canada will hike to 4.25% by the end of this year with some gradual easing expected in 2024. The BOJ holds rates through 2024 while officials towards the end of that year relax yield-curve control to allow some steepening, the OECD said.
The OECD view aligns with recent IMF advice to G20 leaders that despite a global economy tilting towards recession, leaders should keep tightening fiscal and monetary policy to get inflation back under control. The OECD said "our central scenario is not a global recession, but a significant growth slowdown for the world economy in 2023, as well as still high, albeit declining, inflation in many countries."