OECD "Tightening Must Continue Until Inflation Is Controlled"

US Fed recommends maintaining interest rates at 5.25~5.5% until the second half of next year

The Organisation for Economic Co-operation and Development (OECD) has warned that major countries need to maintain the current high-intensity tightening phase for a while to curb global inflation.

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In its interim economic outlook released on the 19th (local time), the OECD stated, "Even the United States, where signs of inflation slowdown are appearing, cannot yet be considered victorious in the fight against inflation."

The OECD recommended that the U.S. Federal Reserve (Fed) maintain the benchmark interest rate at 5.25-5.5% until the second half of next year, and emphasized that the European Central Bank (ECB) and the Bank of England (BOE) need to raise their benchmark interest rates further from current levels. The current benchmark interest rates for the Eurozone and the UK are 4.5% and 5.25%, respectively. The BOE has raised its benchmark interest rate 14 consecutive times since December 2021, and the ECB has increased rates 10 consecutive times since July last year.

In particular, the OECD stated that major countries should monitor the situation until many indicators such as the Consumer Price Index (CPI), wage growth pressures, and corporate pricing policies sufficiently slow down. There are not yet enough signs that inflation will ease, as international oil prices have surpassed $95 per barrel.

The OECD also viewed China’s economic downturn as a significant risk factor for the global economy. It estimated that if China’s economic recession and financial market crisis occur simultaneously, more than one-third of the global economic growth rate would decline. The OECD forecasted, "At the point when China’s domestic consumption decreases by 3%, the impact will be directly transmitted to Asian countries and countries with a high export ratio to China," and "The U.S. and Europe will experience indirect shocks such as stock market declines."

If major countries desire a faster economic recovery than expected, resolving trade disputes between nations could be the answer, the OECD suggested. Recently, Western countries aligned against China have been issuing sanctions targeting China, such as the Inflation Reduction Act (IRA) and the Critical Raw Materials Act (CRMA). China is responding with countermeasures, including controlling exports of rare minerals. The OECD diagnosed that such conflict situations are leading to increased inefficiencies in the global trade market.

The OECD emphasized, "Although people are concerned about security, it is not necessary to reduce trade with conflicting countries to enhance economic resilience," and added, "The most effective measure to promote economic growth is to remove some trade barriers."