International Monetary Fund urges central banks to remain firm on inflation

Keeping borrowing costs elevated for longer than expected would not be ‘unreasonable’, says chief economist

The Federal Reserve needs to hold its nerve in its fight against the worst bout of US inflation for a generation, a senior International Monetary Fund (IMF) official said, as he urged the central bank to keep monetary policy tight on signs of economic strength.

Pierre-Olivier Gourinchas, the fund’s chief economist, told the Financial Times despite recent falls, inflation remained too high for comfort in the US. Any policy easing would be a “huge risk” given the hard-fought battle to bring inflation down.

“What is really important is that monetary policy remains in tightening territory,” he said ahead of annual meetings of the fund and World Bank being held this week in Morocco. “The cost of easing too early is probably higher than the cost of tightening a little more, especially when you have an economy that keeps surprising to the upside.”

Target range

He added that keeping borrowing costs elevated for longer than expected, or even raising rates again from their current target range of 5.25 per cent to 5.5 per cent, would not be “unreasonable”.


While a spate of rate rises by multiple central banks is taming price pressures — and weighing on global growth — inflation is still expected to hang above target in 93 per cent of economies with an inflation goal, including the US, the IMF said in its latest World Economic Outlook, released on Tuesday.

Most central banks, including the Fed, the European Central Bank and the Bank of England, target inflation of 2 per cent, personal consumption expenditure inflation in the US is now 3.5 per cent, against consumer price index inflation of 4.3 per cent in the euro area and 6.7 per cent in the UK.

Returning inflation to target is expected to take until 2025 in “most cases,” the IMF warned.

Inflation is set to remain high despite expectations of weaker global growth of 2.9 per cent next year, down from 3.5 per cent in 2022 and 3 per cent this year, according to the IMF’s latest forecasts.

The legacy of central bank tightening is playing out in credit markets, the IMF found, with “clear signs that tighter credit conditions are increasingly affecting real activity”.

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In advanced economies, credit and investment demand shrank in the first half of the year. House prices have been growing more slowly or going into reverse, while bankruptcy rates are up 20 per cent in the US over the past year.

But tougher conditions do not amount to a “credit crunch”, the IMF added.

Surprisingly robust hiring data in the US helped renew a global sell-off on bond markets on Friday, as investors bet official interest rates would stay higher for longer than originally anticipated.

An Ice Bank of America index of US 30-year Treasuries has fallen by 13.5 per cent since the start of the year. Yields on 30-year US debt reached a 16-year high of more than 5 per cent last week, before settling at 4.95 per cent when markets closed.

The fund lifted its gross domestic product forecasts for the US this year and next, from an earlier round of projections in July. It now predicts an expansion of 2.1 per cent in 2023 and 1.5 per cent in 2024.

‘Expansionary’ policy

The upgrade of 0.3 percentage points in 2023 and 0.5 percentage points for 2024 reflects stronger business investment and resilient consumption, as well as “expansionary” fiscal policy this year, the IMF said, predicting the US was set to rack up net borrowing of 8.2 per cent of the country’s GDP.

The forecast for the euro area was cut, however, to growth of 0.7 per cent this year and 1.2 per cent in 2024. Germany is predicted to be particularly weak, with output falling 0.5 per cent this year before rising by just 0.9 per cent in 2024.

Among G7 economies Japan is set for the firmest growth after the US this year, at 2 per cent, before momentum fades next year with growth tipped to be 1 per cent. The UK economy will barely expand, with GDP seen rising by just 0.5 per cent in 2023 and 0.6 per cent in 2024 — the latter figure some 0.4 percentage points below prior forecasts.

The IMF trimmed its predictions for Chinese growth both this year and next, forecasting growth of 5 per cent in 2023 and 4.2 per cent in 2024. — Copyright The Financial Times Limited 2023