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The IMF’s chief economist has warned progress on bringing inflation under control could still stall on the back of stubbornly high services prices, scuppering hopes of early rate cuts.
Pierre-Olivier Gourinchas told the Financial Times ahead of the publication of the fund’s updated World Economic Outlook that officials “should be ready for more bumps in the road” as they wrestle to get inflation back to their 2 per cent goals.
He added that services price pressures were proving “persistent” on both sides of the Atlantic, despite the recent progress in lowering inflation overall.
Separately, the fund warned in the outlook that “the escalation of trade tensions could further raise near-term risks to inflation by increasing the cost of imported goods along the supply chain”.
Gourinchas’s comments, made on Monday, come as central banks prepare to ease their monetary policies, with the European Central Bank already pushing through one reduction and the Federal Reserve and Bank of England looking for an opportunity to cut in the coming months.
The fund warned that lingering price pressures could yet delay the return of lower borrowing costs.
“The risk of elevated inflation has raised the prospects of higher-for-even-longer interest rates, which in turn increases external, fiscal, and financial risks,” the fund said.
The fund’s forecasts show inflation globally is unlikely to hit 2 per cent until the end of 2025.
Despite the IMF’s reservations, investors anticipate the Fed will deliver its first cut in September, after chair Jay Powell and other US rate-setters said recent inflation data showed “progress”.
While the recent decline in US price pressures was a “step in the right direction”, the world’s largest economy was strong enough to mean policymakers could “afford to wait a little bit longer, if needed, in terms of the pivot towards easing interest rates”.
Central banks globally are facing a trade-off, balancing keeping a firm enough grip on inflation to ensure it trends back to 2 per cent target while also safeguarding against a sharp rise in lay-offs.
The BoE’s policy committee next sets rates on August 1, in what promises to be a divided vote.
The fund also warned of the potential for “significant swings” in economic policy this year as a result of elections around the world, with rising protectionism one of the possible consequences.
Republican nominee Donald Trump wants to levy a 10 per cent tariff on all imports, and a 60 per cent fee on those coming from China. On Monday, Ohio senator JD Vance, a supporter of protectionism and restrictions on immigration, was named his pick for vice-president.
“Trade tariffs, alongside a scaling up of industrial policies worldwide, can generate damaging cross‐border spillovers, as well as trigger retaliation, resulting in a costly race to the bottom,” the fund said.
However, trade between countries was set to expand by 3.25 per cent this year, after stagnating in 2023.
The fund left its forecast for global growth unchanged at 3.2 per cent this year. It estimates growth will pick up slightly to 3.3 per cent in 2025.
The US economy would grow at a slightly slower pace than anticipated, expanding 2.6 per cent in 2024 and 1.9 per cent next year.
Euro area growth is set to rebound to 1.5 per cent in 2025 after registering a 0.9 per cent clip this year. The UK will expand by 0.7 per cent this year, slightly higher than forecast in April, and by 1.5 per cent in 2025, the IMF said.
The Fund sharply increased its forecasts for China by 0.4 percentage points to 5 per cent and 4.5 per cent in 2024 and 2025, respectively.
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