Central banks must keep interest rates high for at least another 12 months to completely tackle inflation, International Monetary Fund (IMF) ) warned.
The fund urged central bankers to “pay utmost attention” to the lessons of history, which suggest it will take “years to 'resolve' inflation, bringing it down to the level that prevailed before the initial shock.”< /p>
Economists Anil Ari and Lev Ratnovsky warned in a report for the IMF: “Countries have historically celebrated victory over inflation and eased policy prematurely in response to an initial decline in price pressures. This was a mistake because inflation soon returned.”
They named Denmark, France, Greece and the United States among the countries that made this mistake in the 1970s, when much of the world economy was hit by oil price shocks . .
The IMF said: “Central bankers are right to warn that the fight against inflation is far from over, even as recent data shows a welcome decline in price pressures.”
It comes as Bank of England officials try to counter investor expectations that UK rates could fall as early as next year after inflation plummeted to 4.6%.
Andrew Bailey, governor of the Bank of England, said it was “too early” to think about cutting rates and stressed the need to keep borrowing costs at 5.25% to ensure inflation returns to Threadneedle Street's target of 2%.
Megan Green, a member of the Bank of England's monetary policy committee, said on Thursday she was concerned about “persistent inflation” given strong wage growth and rising service sector prices.
She said: “In order to sustainably return inflation to target, the MPC must balance the risks of doing too little and doing too much.”
“These risks have been more clearly balanced since the start of the summer, partly due to weakening activity. But output data remains mixed, and I remain more concerned about persistent inflation.”
In its report, the IMF said: “History teaches us that inflation is persistent.”
In the 1970s, only 60% of countries successfully brought inflation under control. within five years. Those who have succeeded have done so by keeping interest rates high for more than three years on average.
The Bank of England began raising rates just two years ago, suggesting that borrowing costs should remain high for at least one more year to ensure that inflation is truly defeated.
As well as calling on central banks to keep interest rates higher over the next year. longer, the IMF warned governments against sharp spending increases or tax cuts.
The IMF said: “Central bankers are at the forefront of the fight against inflation and should pay close attention to these lessons. But governments should not make the task of monetary authorities more difficult by increasing price pressure through loose fiscal policy.”
Jeremy Hunt last week announced what he called “the biggest business tax cut in modern British history”. The Chancellor says the decision to make investment tax credits permanent will boost economic growth without causing prices to rise.
Despite the Chancellor's efforts to boost investment, a Bank of England survey of business executives found they expect that investment will fall by around 10% in the final quarter of the year due to high interest rates.
Businesses also expect inflation to be stuck above 3% for three years, adding to pressure on the Bank of England, forcing keep it at high stakes.
Meanwhile, the IMF warned that hopes for strong growth in renewables and electricity vehicles could be derailed by the fragmentation of the global economy.
Analysts warn that critical minerals such as lithium and cobalt could stop flowing around the world if a separate economic bloc emerges, led by Russia and China, and is cut off from the West.
The IMF said: “Critical minerals could someday become as important to the global economy as oil today.”
“Fragmentation of critical mineral markets could make the clean energy transition more costly and potentially delay much-needed climate change mitigation policies.”
If the world splits, The IMF fears that investment in renewable energy could fall by a quarter in 2030 compared to current projections. , and the production of electric vehicles may be a third lower than predicted.
Recent Comments