According to the International Monetary Fund, interest rates in major economies will have to remain high for longer than hoped because inflation is proving difficult to contain.
It is proving difficult to slow the rise in prices and central banks may be forced to “keep borrowing costs high for even longer,” said research director Pierre-Olivier Gourinchas at the publication of the IMF’s economic outlook late Tuesday evening.
The Federal Reserve was also on his list – despite indications that the US central bank could soon shift gears in view of falling inflation in the world’s largest economy.
Mr Gourinchas said persistently high interest rates would push up the US dollar and slow economic growth.
Australia has also encountered obstacles in reducing inflation, and borrowers are bracing for local interest rates to remain above four percent until the end of 2024.
Recent high inflation data led to some significant revisions to interest rate forecasts, with some commentators abandoning optimistic views that the Reserve Bank of Australia would cut interest rates later in the year.
Instead of a cut, markets are now expecting an increase of 17 percent in August.
“The good news is that as the headlines died down, (global) inflation fell without causing a recession,” Gourinchas said.
“The bad news is that inflation in energy and food prices has now almost returned to pre-pandemic levels in many countries, but overall inflation has not.”
He expressed concern that inflation in wages and services – such as rents or education – would continue to rise as they caught up with earlier increases in goods prices.
Governments are also not acting quickly enough to reduce their debts, said Gourinchas. He blamed the USA in particular, whose borrowing has skyrocketed despite low unemployment.
The IMF forecast for Australian economic growth was cut by 0.1 percentage points to 1.4 percent in 2024, while it remained unchanged at 2 percent for 2025.
This is somewhat more pessimistic than the federal budget from May.
The country’s largest trading partner, China, was expected to grow by 5 percent this year, 0.4 percentage points more than in last year’s report.
But things are likely to go downhill from there, as the population of this vast Asian country ages and suffers from slow productivity growth.
“By 2029, growth in China is expected to slow to 3.3 percent, well below the current pace,” the IMF said.
Bank of America also expressed pessimism about China on Tuesday, arguing that economic stimulus was necessary for the country to achieve its growth target of five percent.
“Weaker-than-expected retail sales … underlined weakness in consumption and demand,” the bank said.
ANZ was similarly cautious earlier this week, saying China’s “official growth target of 5 percent for 2024 is not a done deal.”
The four major banks pointed to an extraordinary decline in the Chinese real estate market. In the six months to June, sales fell by 27 percent.
Both Bank of America and ANZ said they would closely monitor a meeting of China’s Politburo later this month.