(Reuters) – Global central banks must impress on financial markets that interest rates are likely to stay high for a long time to bring inflation sustainably below target and avoid a price rebound, argued the International Monetary Fund (IMF) on Thursday.
The warning comes amid a marked easing in financial conditions since October, with investors taking the recent slowdown in inflation as a signal of an upcoming pivot on central bank monetary policy even as they continue to rally. their interest rate.
“Central banks should communicate on the likely need to keep interest rates higher for longer, until there is evidence that inflation – including wages and service prices – has returned to target for a long time,” wrote the head of the IMF’s Monetary and Financial Markets Department, Tobias Adrian, and his two deputies in a blog post.
“A premature easing could put inflation at risk of a sharp resurgence once activity rebounds, leaving countries susceptible to further shocks that could unanchor inflation expectations,” they added.
The disconnect between the financial markets and the discourse of central banks was illustrated on Wednesday and Thursday, with the announcements of the American Federal Reserve (Fed) and the European Central Bank (ECB).
Fed Chairman Jerome Powell indicated that there were no plans to lower the cost of credit in 2023 but investors ignored him and continued to bet on a rate cut within the year, which s is reflected in a rise in US equity indices on Wednesday evening.
Same scenario on the side of the ECB, which raised its rates again on Thursday and indicated that it expects an increase of the same magnitude in March. Financial markets immediately interpreted these decisions as a sign that the monetary tightening cycle could in fact soon come to an end.
According to the IMF, history has shown that high inflation often takes time to reverse in the absence of “strong and decisive” monetary policy action. The fund believes that if the rise in goods prices has slowed, it is unlikely that this will be the case in the services sector without a significant slowdown in the labor market.
“It is essential that central banks avoid misinterpreting sharp declines in goods prices and ease policy before services inflation and wages, which are adjusting more slowly, have also come down sharply.” , write the authors.
“It is essential that policymakers remain resolute and focused on getting inflation back to target without delay.”
(Report Lindsay Dunsmuir; Blandine Hénault for the French version, edited by Matthieu Protard)
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