WASHINGTON: Inflation is easing faster than expected but has not been fully defeated, International Monetary Fund chief Kristalina Georgieva said on Thursday, urging central bankers to carefully calibrate their decisions on cutting interest rates to incoming data.
Georgieva said headline inflation for advanced economies was 2.3 percent in the final quarter of 2023, down from 9.5 percent just 18 months ago, and the downward trend was expected to continue in 2024.
That would create the conditions for central banks in major advanced economies to begin cutting rates in the second half of the year, although the pace and timing would vary, she told an event hosted by the Atlantic Council think tank.
"On this final stretch, it is doubly important that central banks uphold their independence," Georgieva said, urging policymakers to resist calls for early rate cuts when necessary."Premature easing could see new inflation surprises that may even necessitate a further bout of monetary tightening. On the other side, delaying too long could pour cold water on economic activity," she said.
Georgieva said next week's World Economic Outlook would show that global growth is marginally stronger given robust activity in the United States and in many emerging market economies, but gave no specific new forecasts.
She said the global economy's resilience was being helped by strong labor markets and an expanding labor force, strong household consumption and an easing of supply chain issues, but said there were still "plenty of things to worry about."
"The global environment has become more challenging. Geopolitical tensions increase the risks of fragmentation ... and, as we learned over the past few years, we operate in a world in which we must expect the unexpected," Georgieva told an event hosted by the Atlantic Council think tank.
She said global activity was weak by historical standards and prospects for growth had been slowing since the global financial crisis of 2008-2009. The global output loss since the start of the Covid-19 pandemic in 2020 was $3.3 trillion, disproportionately hitting the most vulnerable countries.
Georgieva said the U.S. had seen the strongest rebound among advanced economies, helped by rising productivity growth. Euro area activity was recovering more gradually, given the lingering impact of high energy prices and weaker productivity growth.
Among emerging market economies, countries like Indonesia and India were faring better, but low-income countries had seen the most severe scarring.
Given a significant and broad-based slowdown in productivity growth, the IMF's five-year outlook for global growth was just above 3 percent, well below its historical average of 3.8 percent, she said.
"Without a course correction, we are ... heading for 'the Tepid Twenties' - a sluggish and disappointing decade," Georgieva said, urging continued vigilance to restore price stability, rebuild fiscal buffers and jumpstart growth.
She said foundational reforms, such as strengthening governance, cutting red tape, increasing female labor market participation and improving access to capital could lift output by 8 percent in four years, she said.
Even more was possible with policies to encourage economic transformation, speeding up the green and digital transition, which could offer huge opportunities for investment, jobs and growth, she said.
Artificial intelligence offered huge potential benefits but also risks, with a recent IMF study showing that AI could affect up to 40 percent of jobs across the world and 60 percent in advanced economies, Georgieva said.
US interest rates
IMF chief said higher US interest rates were not great news for the rest of the world and could become a worry if they continued for a long time, but she thought the US Federal Reserve was acting prudently.
Georgieva said the U. government could also look at taking other measures to ensure that the U.S. economy was not overheating, but gave no details.
"Higher interest rates for the rest of the world is not great news. Higher interest rates make the US more attractive so financial flows come here and that leaves the rest of the world somewhat struggling," she said.
Higher rates also drove the value of the dollar higher, which meant other countries' currencies were weaker."If it continues for a long time, it could become a bit of a worry in terms of financial stability," she said.Consumer level inflation data for March released on Wednesday was unexpectedly strong, casting further doubt on the Fed’s current forecast of rate cuts at some point later this year.
The unfavorable price pressure data comes as other reports also pointed to sturdier inflation over the start of the year, challenging the Fed’s most recent projections that penciled in three rate cuts this year.
Minutes from the US Federal Reserve showed officials worried that progress on inflation may have stalled, and a longer period of tight monetary policy would be needed to tame it in the world's largest economy.
Investors who had earlier expected a rate cut in June now see September as a likelier timing for the easing cycle to begin, following a third consecutive stronger-than-forecast reading on consumer inflation.
Georgieva said the US economy had been successful because it was more innovative, opening space for entrepreneurship at a time of accelerating technological change.The US labor market had also held up well, with labor supply boosted by immigration, which in turn helped keep wage growth under control, she said.
The Biden administration's Inflation Reduction Act and earlier COVID aid had helped support growth, she said, adding that the International Monetary Fund saw some scope for the U.S. government to address lingering inflation and work toward a soft landing for the economy."So fasten your belts," she said. "At some point we will be landing."