IMF Chief Warns Central Banks Against Cutting Too Soon

By Paul Hannon

Central banks should resist the temptation to lower their key interest rates too early and risk a resurgence of inflation and a fresh bout of policy tightening, the head of the International Monetary Fund said Thursday.

In a speech ahead of a twice-yearly gathering of economic policy makers from around the world next week, IMF Managing Director Kristalina Georgieva celebrated progress toward reducing inflation rates over the past year following sharp rises in central bank interest rates.

But she cautioned against easing policy too soon.

"Where necessary, policymakers must resist calls for early interest rate cuts," Georgieva said. "Premature easing could see new inflation surprises that may even necessitate a further bout of monetary tightening."

Georgieva was speaking the day after figures released by the Labor Department recorded a pickup in U.S. inflation during March, making it the third straight month in which consumer prices rose more rapidly than expected. The figures rattled financial markets, heightening investors' worries that the Federal Reserve won't cut interest rates anytime soon.

The IMF chief said inflation is likely to ease during the course of this year, but urged central bankers in large, rich countries such as the U.S. to exercise patience.

"We expect the trend to continue in 2024, creating the conditions for major advanced economy central banks to begin cutting rates in the second half of the year," she said.

The European Central Bank left its key interest rate unchanged Thursday, but it has signaled that it is likely to lower borrowing costs in June.

The IMF will release new forecasts for the global economy next week, and Georgieva said the projected outcomes will be better than previously anticipated, thanks in part to the continued strength of the U.S. economy.

"You will see in our World Economic Outlook next week that global growth is marginally stronger on account of robust activity in the United States and in many emerging markets economies," she said. "Robust household consumption and business investment, and an easing of supply chain problems helped."

In January, the IMF forecast that the global economy would grow by 3.1% this year and 3.2% in 2025, little changed from the 3.1% rate of expansion it estimated for 2023.

Georgieva highlighted the role of immigration in making it possible for workforces in many rich countries to continue to grow, underpinning the resilience of the global economy.

"It is tempting to breathe a sigh of relief," she said. "We have avoided a global recession and a period of stagflation."

However, Georgieva said the expected growth of the global economy is "well below" its prepandemic average of around 3.8%.

"Without a course correction, we are heading for 'the Tepid Twenties,' a sluggish and disappointing decade," she said.

The IMF has warned that the redirection of trade to countries that are geopolitical allies and away from those that are perceived to be potentially hostile risks weakening global economic growth.

To that threat, Georgieva added the increasing popularity of what is known as "industrial policy," usually in the form of subsidies to domestic producers and restrictions on their foreign competitors.

She warned those actions could lead to "costly mistakes," and said the Fund is increasing its focus on industrial policy.

"If there is no market failure, there is a need for caution," she said. "The case for government intervention is much weaker. Some of the measures announced or implemented last year were not always clearly related to market failures."

Write to Paul Hannon at paul.hannon@wsj.com

(END) Dow Jones Newswires

April 11, 2024 09:14 ET (13:14 GMT)

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