IMF warns against sudden drop in interest rates

IMF Chief Economist Pierre-Olivier Gourinchas

Pierre-Olivier Gourinchas, chief economist at the IMF

The International Monetary Fund is warning against a sudden drop in interest rates in various countries.

IMF Chief Economist Pierre-Olivier Gourinchas says while inflation is easing, central banks around the world must critically assess the state of affairs. 

“Monetary tightening worked through two additional channels. First, the rapid pace of tightening convinced people and companies that high inflation would not be allowed to take hold. This prevented inflation expectations from persistently rising and reduced the risk of a wage price spiral. Second, the unusually synchronised nature of tightening lowered world energy demand and prices directly reducing headline inflation. Saddle banks must now avoid a premature easing that would undo hard-earned credibility and lead to a rebounded inflation,” he suggested. 

However, he said central banks should look at easing rates where applicable, especially where signs of strains are growing in interest rate-sensitive sectors such as construction and loan activity has declined markedly in many countries. 

“Staying on the path toward a soft landing will not be easy. The biggest challenge ahead of us is to tackle elevated fiscal risks. Most countries came out of the pandemic and energy crisis with higher public debt levels and higher borrowing costs. Bringing down public debt and deficits will help deal with future shocks,” he reasoned. 

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