OECD says central banks should keep calm even amid inflation hikes

According to the OECD, central banks need to keep calm amid a slower global economic recovery, the on-going imbalances, and a stronger-than-expected inflation growth.

In its new report, the organization said price increases will reach their peak by the end of the year, as demand stabilizes, supply issues decrease and people get back to work. This situation causes “significant policy challenges” for the government which has to be ready to interfere, but needs to avoid sudden and sharp moves not to worsen the inflation problem.

“With the current conditions, central banks should wait for supply issues to diminish and show they will act as soon as it’s necessary,” – OECD Chief Economist Laurence Boone noted.

The latest inflation numbers from major economies are worrying central bankers. In October, the U.S. inflation reported the fastest pace since 1990. Meanwhile, the euro area saw the highest result in the history last month. At the same time, the Bank of England has already prepared for rising rates in the nearest future trying to avoid overheating.

The new virus strain makes it even more difficult to assess the necessary level of policy support. Federal Reserve Chair Jerome Powell warns about an increased uncertainty over inflation, adding that we should stop using the word “transitory” when we talk about price growth.

Although the forecasts were mostly prepared before omicron hit the global markets and investor confidence, the OECD still includes new variants into its list of significant risks concerning forecasts. The list also includes a potential disappointment in China’s economy and the on-going sharp inflation growth.

The OECD changed its global growth forecast for this year, reducing it by 0.1% to 5.6%, but kept its 4.5% expectation for the next year unchanged. It also cut its projections for U.S., Chinese and euro-area performances for 2021 and 2022.

 

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