Everybody’s Still Too Optimistic About Interest Rate Cuts, Says The OECD

Everybody’s Still Too Optimistic About Interest Rate Cuts, Says The OECD
Reda Farran, CFA

3 months ago2 mins

If you’re looking for interest rate cuts to happen anytime soon – and plenty of people are – the OECD thinks you’re absolutely kidding yourself. In its just-released global outlook, the organization says lingering inflation pressures will force central banks in the US and Europe to keep interest rates higher for longer than investors expect. It’s one of four sobering warnings in the organization’s latest outlook.

First, yes, the interest rates. The OECD predicts that rate cuts will begin in the US in the second half of 2024, and across the eurozone in the spring of 2025. That’s considerably later than what the market is estimating – anticipating cuts as early as next April for the US and May for Europe.

Second, it’s warning that, although the global economy may avoid a recession, growth is fading in many countries and won’t edge up until 2025, when consumers’ real (i.e. inflation-adjusted) incomes finally recover from the inflation shock and the effects of those freshly lowered borrowing costs kick in. Until then, growth is going to struggle, decelerating from an already weak 2.9% in 2023 to just 2.7% next year – the slowest pace since the financial crisis (not counting the first year of the coronavirus pandemic). And that slog, the OECD says, is because of tighter financial conditions, slowing world trade, and fading business and consumer confidence.

Third, it expects average inflation in the G20 economies to ease only gradually, falling to 5.8% in 2024 and 3.8% in 2025, compared with 6.2% in 2023. Interestingly, it noted that over half of the items in the consumer price indexes in the US, eurozone, and UK are still showing annual gains above 4%. (Remember, central banks typically set long-term inflation targets at around 2%.) What’s more, core inflation, which excludes volatile food and energy prices to give a better idea of underlying pressures, is proving to be quite sticky and remains relatively high.

And fourth, the OECD is calling out the “challenging fiscal outlook” confronting many governments as the costs of keeping up with their debts rise alongside interest rates. The organization said that many developed countries could jeopardize their long-run fiscal sustainability unless they really rein in their borrowing habits – something easier said than done for all of us – but particularly for governments right now, as they watch expenses rise because of their aging populations and the climate transition.

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