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The IMF’s chief economist has warned that progress in getting inflation under control could still stall due to stubbornly high service prices, dashing hopes of an early rate cut.
Pierre-Olivier Gourinchas told the Financial Times ahead of the release of the fund’s updated World Economic Outlook that officials “should be prepared for more bumps in the road” as they battle to get inflation back to their 2 percent targets.
He added that pressures on service prices had proved “persistent” on both sides of the Atlantic, despite recent progress in reducing overall inflation.
Separately, the IMF warned in the outlook that “an escalation of trade tensions could further raise near-term risks to inflation by raising the cost of imported goods in the supply chain.”
Gourinchas’ comments, made on Monday, come as central banks prepare to ease their monetary policy, with the European Central Bank already pushing for one cut and the Federal Reserve and Bank of England looking for opportunities to cut in the coming months.
The fund warned that lingering price pressures could delay the return of lower borrowing costs.
“The risk of increased inflation has raised the prospect of higher or even longer interest rates, which in turn increases external, fiscal and financial risks,” he said.
IMF forecasts show that global inflation is unlikely to reach 2% by the end of 2025.
Despite the IMF’s reservations, investors expect the Fed to make its first rate cut in September after Chairman Jay Powell and other US ratemakers said recent inflation data showed “progress”.
While the recent decline in U.S. price pressures was “a step in the right direction,” the world’s largest economy was strong enough that policymakers could “afford to wait a little longer, if necessary, on the pivot to easing interest rates.” ” said Gourinchas.
Central banks around the world face a trade-off between keeping a tight enough grip on inflation to ensure it moves back to the 2% target while guarding against a surge in layoffs.
The BoE’s policy committee will next set rates on August 1, promising a split 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 possible consequence.
Republican presidential candidate Donald Trump wants to impose a 10 percent tariff on all imports and a 60 percent levy on imports from China. Ohio Senator JD Vance, an advocate of protectionism and immigration restrictions, was named his running mate on Monday.
At a press briefing on Tuesday, Gourinchas noted that countries that have imposed fees in the past have typically borne the cost of those duties. “It hurts the domestic economy and it also causes spillovers to other countries,” he said.
However, after stagnating in 2023, trade between the countries was expected to increase by 3.25 percent this year.
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The fund kept its global growth forecast for this year unchanged at 3.2 percent. It estimates that growth will accelerate slightly to 3.3 percent in 2025.
The U.S. economy will grow slightly slower than expected, growing by 2.6 percent in 2024 and 1.9 percent next year.
Eurozone growth is expected to return to 1.5 percent in 2025, after falling by 0.9 percent this year. Britain will expand by 0.7 percent this year, slightly more than expected in April, and by 1.5 percent in 2025, the IMF said.
The fund sharply raised its growth forecasts for China by 0.4 percentage points to 5 percent and 4.5 percent in 2024 and 2025, respectively.