The OECD Has A Warning For Central Banks: Go Slow

The OECD Has A Warning For Central Banks: Go Slow
Reda Farran, CFA

14 days ago5 mins

What happened last week?


  • The OECD upgraded its global growth forecast, partly because of the strength of the US economy.


  • UK house prices rose for the fourth consecutive month in January.


  • Chinese stocks surged after the government intensified its efforts to prop up the market.
  • Consumer prices in China fell at the fastest rate in 15 years last month.
  • Gold demand hit a record last year, thanks to strong central bank buying and jewelry purchases in China and India.

What does all this mean?

The OECD is slightly more optimistic about the world economy these days, revising up its 2024 global growth forecast to 2.9%, from 2.7%. But that’s still a slowdown from last year’s 3.1%, and the group expects only the smallest improvement in 2025, with a 3% forecast. Among major economies, the US was particularly strong at the end of 2023, buoyed by its robust consumer spending and labor market, prompting the OECD to ratchet up its forecast for 2024 growth to 2.1% from 1.5%. But it expects that strength to be offset by poorer showings for most European nations, where the OECD said higher interest rates and tougher lending conditions are having an impact. So much so, in fact, that it slashed its eurozone growth forecast for this year to 0.6%, from 0.9%.

British mortgage provider Halifax said the average UK house price rose by 1.3% between December and January, the fastest monthly increase since June 2022. And that’s on top of price gains in the previous three months. On a year-over-year basis, prices rose 2.5%, the fastest pace in 12 months, bringing the average home price to a 15-month high of £291,000 ($367,600). The figures are the latest sign that the real estate market is bouncing back after a long run of aggressive interest rate hikes from the Bank of England sapped demand.

The Chinese government stepped up its efforts to stop a slide that’s sent its benchmark CSI 300 index to a five-year low. Shares, which were down 40% from their 2021 peak, began climbing last week after an investment arm of China’s sovereign wealth fund said it would expand its purchases of local ETFs. They continued their climb after Chinese regulators said they’d encourage institutional investors to hold some shares for longer. Together, the announcements helped send the CSI 300 index 5.8% higher last week.

Consumer prices in China fell for the fourth straight month in January, slipping by 0.8% from a year ago – the biggest drop in almost 15 years and far steeper than the 0.5% forecast by economists. What’s more, producer prices, which reflect what factories charge wholesalers for products, fell for a 16th straight month, declining by 2.5%. Prolonged deflation – a result of weak domestic demand amid other economic troubles – is becoming a big worry for China because it can lead to a downward spiral of economic activity. Anticipating further price drops, consumers might delay purchases, further dampening already weak consumption. Businesses, in turn, might lower production and investment due to the uncertain demand outlook. And this cycle is tough to reverse.

Total global demand for gold rose by 3% in 2023 to hit a record 4,899 metric tons, according to the World Gold Council. Central banks, on balance, bought 1,037 tons of the metal – just 45 tons shy of the record set in 2022 – as countries sought to hedge against inflation and diversify their reserves to reduce their exposure to the US dollar. Chinese investors have also been snapping up gold, looking to store their wealth somewhere safe as the country faces a property crisis, a weakened yuan, a drop in bond yields, and a slumping stock market. Jewelry purchases in China were also on the up, climbing 10% last year to 630 tons, eclipsing demand in India – a traditionally huge market for the bling – by 68 tons.

This week’s focus: Big decisions

The OECD also urged the world’s major central banks to stay on course in their efforts to combat inflation, saying it’s still not clear whether higher interest rates have successfully contained underlying price pressures. The global group said it expects the Federal Reserve to begin cutting rates by the second quarter, and for the Bank of England and European Central Bank to follow in the third quarter. But it warned central banks to lower borrowing costs gradually and not to drop them back down to the near-zero pre-pandemic levels.

And it’s not because the OECD sees inflation flaring back up: it’s actually just lowered its inflation forecasts for most major economies for this year and next. It’s instead because the organization sees reason to be cautious: the factors that have helped bring inflation down – including improvements in supply chains and commodity costs – are dissipating, or even reversing. What’s more, the potential for a wider conflict in the Middle East that disrupts energy supplies is a big and growing economic risk, the group said. Its latest assessment found that the recent doubling in shipping costs stemming from disruptions in the Red Sea could add 0.4 percentage points to global inflation after a year.

The week ahead

  • Monday: US federal budget (January).
  • Tuesday: UK labor market report (January), US inflation (January). Earnings: Coca-Cola, Airbnb, Shopify.
  • Wednesday: UK inflation (January), China foreign direct investment (January). Earnings: Kraft Heinz, Cisco, Occidental Petroleum.
  • Thursday: Japan economic growth (Q4), UK economic growth (Q4), eurozone trade balance (December), US retail sales and industrial production (January). Earnings: Coinbase, Deere, Applied Materials.
  • Friday: UK retail sales (January), US housing starts (January), US consumer sentiment (February).


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