OECD: Interest rates must rise despite economic slowdown

Global central banks must continue to raise interest rates in the fight against rising and pervasive inflation, despite a significant slowdown in the global economy, stated the Organisation for Economic Co-operation and Development (OECD).

The unexpected spike in prices and its impact on incomes is harming people around the world, creating problems that will only worsen in the coming period if policymakers do not take action, the organization announced. The OECD also raised its inflation forecasts for 2023 compared to its September projections, and the expected price growth next year will remain significantly above central bank targets: at 3.4 percent in the eurozone, 3.3 percent in the UK, and 2.6 percent in the US.

– Controlling inflation must currently be the main priority. Otherwise, we could end up with a wage-price spiral just like in the 1970s, or we will find ourselves in a situation where inflation becomes so entrenched that the painful effort to control it will be even greater – said the interim chief economist of the OECD, Alvaro Santos Pereira, to Bloomberg.

Such advice comes at a difficult time for the global economy, which is already slowing under the weight of rising energy costs as Russia continues its war in Ukraine. Another risk of higher interest rates is the increasing cost of credit, especially for low-income countries. According to the OECD, two-thirds of them are already in significant debt problems.

However, the organization stated that some early signs of success in taming prices indicate that central banks should remain on a restrictive course. They highlighted Brazil as a country where the rapid start of rate increases means that inflation has begun to ease in recent months. Recent data also indicate some progress in the fight against inflation in the US, reports Bloomberg.

Although the global economy will experience a significant slowdown in growth, the OECD currently does not foresee a recession. Moreover, it has revised some of its growth forecasts, particularly for the euro area, where a growth of 0.5 percent in 2023 is now visible instead of the 0.3 percent projected in September.

Pereira stated that household savings from the pandemic are cushioning consumption and that support for fiscal policy in Europe has been ‘quite significant’ compared to the OECD’s September estimate. He warned that, however, it must be better targeted to ensure protection exclusively for vulnerable households without further fueling inflation or overburdening public finances.

– In the fight against rising prices, it is also essential that fiscal policy works hand in hand with monetary policy. Fiscal choices that increase inflationary pressures will result in even higher rates to control inflation – concluded Pereira.