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MNI: Tight Monetary Policy Needed As Inflation Persists- OECD

Tight monetary policy will likely be required well into next year as core inflation remains stubborn, the OECD said Friday, raising GDP forecasts based on data gathered before turmoil triggered by the collapse of Silicon Valley and Signature banks.

"The decline in headline inflation has yet to be matched by falling core inflation," the Paris-based group said in its interim Economic Outlook report. “In most countries wage growth remains at rates that, if sustained for some time, would be inconsistent with inflation returning to target.”

Core inflation in the G20 will average 4% in 2023 and 2.5% in 2024, the OECD said, also raising its global 2023 economic growth forecast to 2.6% from 2.2%. "More positive signs have now started to appear, with business and consumer sentiment starting to improve, food and energy prices falling back, and the full reopening of China," the report said.

The improvement in the outlook is still fragile. Risks have become somewhat better balanced, but remain tilted to the downside," the OECD said. "The strength of the impact from monetary policy changes is difficult to gauge and could continue to expose financial vulnerabilities from high debt and stretched asset valuations, and also in specific financial market segments."

The European Central Bank took a similar view about the primacy of inflation pressure Thursday, hiking the key deposit rate half a point and with President Christine Lagarde telling reporters that even after a Credit Suisse backstop “we don’t see any tradeoff between price stability and financial stability.”

Former officials have told MNI the Fed should raise rates next week as a sign of confidence in the banking system's resilience. (See: MNI INTERVIEW: Fed Pause Would Undermine Credibility - Plosser)

The OECD also warned that on the U.S. debt ceiling negotiations, "while an agreement is likely at some point, delays in achieving this would raise uncertainty and create financial turbulence, as in 2013."

MNI Ottawa Bureau | +1 613-314-9647 | greg.quinn@marketnews.com
MNI Ottawa Bureau | +1 613-314-9647 | greg.quinn@marketnews.com

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