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The OECD has warned central banks against cutting interest rates too quickly, citing the threat posed by “persistent” inflation in service prices.
The Paris-based organization said in its latest global outlook that the world economy was showing “remarkable resilience”, as it welcomed a continued easing of overall price pressures after the worst the onslaught of inflation for a generation.
Its growth forecast for the US, the world’s largest economy, was sharply improved to 2.4 percent next year, compared with 1.6 percent in the September outlook, boosted by firm spending and supported by “brisk” wage growth.
Central banks in the majority OECD economies cut rates in response to falling price pressures, with headline inflation returning to target levels in about two-thirds of the advanced economies covered in the report in October.
But with service price inflation at a median of 4 percent in a group of rich nations, central banks could not afford to discount too much, the report said.
“Failure to contain inflation permanently would only increase the risks to growth and real incomes,” said Álvaro Pereira, the OECD’s chief economist. “While the global economy is expected to remain resilient, risks and uncertainties are high.”
The OECD added in its outlook: “Persistent services inflation may threaten the ability to meet inflation targets.”
Many countries still had rates of core inflation – a measure that excludes changes in food and energy prices, which is considered a better indicator of underlying price pressures – that were more than desirable, the OECD warned.
Prices of half of the items in inflation basket of the USA and the UK are still growing at an annual rate that topped 3 percent in October, the OECD found.
While the organization forecast global growth of 3.3 percent in 2025 and 2026, up from 3.2 percent this year, it warned that rising protectionism and geopolitical conflicts threaten to weigh on growth.
Growth in China was also picked up to 4.7 percent for next year, while India was poised for a stronger-than-expected expansion of nearly 7 percent in 2025, the OECD said.
Central banks are expected to continue cutting rates through 2025 and, in some cases, 2026 in all major advanced economies except Japan, where borrowing costs are rising.
The European Central Bank’s benchmark deposit rate, now at 3.25 percent, should bottom out at 2 percent in late 2025, the OECD said. The US central bank’s target range would narrow from the current 4.5-4.75 percent to between 3.25-3.5 percent by the first quarter of 2026, it is forecast.
The OECD also noted rising housing costs in several member countries, led by the UK, Canada, Australia and Latvia. Labor shortages, meanwhile, were particularly severe in healthcare and information technology, the organization said.
Data visualization by Clara Murray in London
