Keep hiking rates. That’s the message from the OECD to central banks including the Federal Reserve and European Central Bank as it urges them to stay focused on the big threat to the world economy - inflation.
In its new global economic outlook, the OECD says central banks shouldn’t be distracted by weaknesses in banking and financial systems or concerned with economic recovery. It says monetary policy needs to remain restrictive until there are clear signs that underlying inflationary pressures are "lowered durably."
We’ve seen plenty of instability, with Silicon Valley Bank being rescued, European bank Credit Suisse sold to rival UBS, a coalition of midsize US banks reportedly have asked regulators to extend federal insurance to all deposits for the next two years, and now six central banks have signed up to a new currency "swap line" to keep money flowing.
Despite these wobbles, the OECD upped its projection for global economic growth, from 2.2% to 2.6% for this year.
It expects the global economy will grow by 2.9% in 2024, up from an earlier 2.7% prediction in November.
But both of these statistics are well below trend; the OECD says global growth has slowed from 3.2% since the beginning of the Russian war in Ukraine, the cost of living crisis and China’s economic slowdown.
New Zealand got a mention in this report, and of course it was for housing.
The OECD gave NZ a shout out for having the housing market with the largest fall, at 14%, from a market peak, which it says is evidence of rising interest rates working.
Sweden had the second largest fall from peak in housing prices, followed by Australia with a 9% fall and Canada rounding out the top four.
Other key takeaways from the OECD’s March economic outlook involve inflation.
While it revised up its global growth predictions for 2023 and 2024, a key factor in this improvement in activity and sentiment in early 2023 was brought by a recent decline in energy and food prices.
It says while inflation levels are still relatively high compared to before Russia’s Ukraine invasion, this drop in energy and food prices is boosting purchasing power for most firms and households and is helping to lower headline inflation.
Headline inflation is what is measured in the consumer price index basket of goods.
For example, it said the brent crude oil price has dropped from US$130 a barrel in June 2022 to US$80 in March this year.
It says inflation for goods has started declining in most countries, due to the return of normal demand post-pandemic and the easing of global supply chain bottlenecks.
But that strength in core inflation, that’s stripping out energy and food costs, continues to be driven by service price increases and cost pressures from tight labour markets.
The OECD is predicting 5.9% inflation in 2023 for the G20, or group of 20 nations, which includes Australia, Canada, Mexico, Russia, the UK, US and European Union.
Annual inflation in NZ has crossed 7%.
The Reserve Bank has been aggressively hiking rates, but as Governor Adrian Orr has pointed out, there are other options to cool inflation that don’t involve NZ’s central bank hammering the populace with high interest pain.
As Orr observed, the government could rein in spending and also increase taxes to help pull demand and money from the economy.
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