London
CNN
–
The International Monetary Fund has warned that stubborn inflation could keep interest rates higher for longer than expected, raising fiscal and financial risks around the world.
Persistently high prices for services – which include haircuts, hotels and restaurants – as well as escalating trade tensions are supporting inflation and raising the prospect that interest rates will remain high for a while yet, the IMF warned on Tuesday. in its latest World Economic Outlook.
The warning points out that the global economy is still not in the clear when it comes to inflation, which explains the caution of central banks in cutting interest rates. High borrowing costs, in turn, are prolonging the squeeze on household and business finances.
Last week, Federal Reserve Chairman Jerome Powell said central bank officials in the United States needed “greater confidence that inflation is moving steadily” toward their 2% target before proceeding with the first interest rate cut.
The Bank of England, meanwhile, held off on cutting rates last month even as UK inflation slowed to the central bank’s 2% target in May. However, service inflation has come in higher than expected.
The Bank of England stressed that “monetary policy should be restrictive for a long period of time until the risk of inflation entering above the 2% target disappears”.
In its report on Tuesday, the IMF said it still expects major central banks to cut borrowing costs in the second half of the year. He foresees a cut by the Fed before the end of the year, chief economist Pierre-Olivier Gourinchas told reporters.
IMF thinks global inflation will slow to 5.9% this year, from 6.7% last year, according to forecast in April.
The agency blamed steady utility price inflation – driven in part by higher wages – for “sustaining progress” in reducing headline inflation.
“Energy and food price inflation is now almost back to pre-pandemic levels in many countries, while overall inflation is not,” Gourinchas said. “Rising prices for services and wages could keep overall inflation higher than desired,” posing a “significant risk” to economic growth, he added.
Tariffs will hurt living standards
The IMF also noted that on the rise Trade tensions “may further increase near-term risks to inflation by raising the cost of imported goods.”
The US and European Union have in recent months raised tariffs on electric cars made in China, fueled by concerns that jobs and strategic local industries could be wiped out by cheap Chinese imports. The US has also raised tariffs on a number of other products from no. 2 economies, including steel, batteries, semiconductors and critical minerals.
Gourinchas said the “escalation of unilateral measures”, including tariffs, was a “major concern” for the IMF.
“If anything, it will distort trade and the allocation of resources, encourage retaliation, weaken growth, reduce living standards and make it more difficult to coordinate policies that address global challenges such as transition of climate,” he added.
The IMF sees the global economy growing by 3.2% this year, as it predicted in April. But the agency cut its forecast for US growth to 2.6% – 0.1 percentage point lower than it forecast in April.
The economy that includes the 20 countries that use the euro is seen expanding by a “modest” 0.9%, 0.1 percentage point higher than was forecast in April.
The IMF also made upward revisions to its 2024 growth forecasts for India and China, which it now expects to expand by 7% and 5% respectively – from forecasts of 6.8% and 4.6% in April. Projected growth in both countries would account for half of global expansion.
“The emerging market economies of Asia remain the main engine for the global economy,” Gourinchas said.