Central Banks Told to Keep Rate Hiking Until Inflation All-Clear

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(Bloomberg) — Global central banks mustn’t let up on raising interest rates until it’s absolutely clear that inflation is durably retreating, according to a senior International Monetary Fund official.

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While headline consumer-price growth has receded in many countries after a drop in energy costs, underlying pressures may not yet have peaked, Tobias Adrian, director of its monetary and capital markets department, said in an interview. 

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That means the risks of not doing enough are still higher than raising too much, he added.

“Central banks’ first order of business remains to get inflation back to target,” Adrian said. “Staying the course and continuing with tightening is certainly what we want to see.”

Decisions are looming this week from the Federal Reserve, the Bank of England and the European Central Bank, and officials from all three have stressed that they’re not yet done raising rates, even if the pace of increases may slow. Economists expect a quarter-point hike in the US and half-point steps in the UK and the euro zone.

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“We’re very comfortable with what central banks are saying and doing, and worry a bit about market optimism and the easing of financial conditions,” said Adrian. “Markets have taken a fairly optimistic view on inflation going forward.”

Bond yields from the US to Europe have dropped since late last year, signaling confidence that policymakers are getting closer to achieving their goals. A slowdown in the economy is feeding that sentiment.

“What’s priced in is that inflation will be close to target in a year — of course there’s a lot of upside risk to that,” said Adrian, who is a former official at the New York Fed. “Optimism that a small slowdown will be accompanied by a significant fall in inflation is a conundrum for central banks. The risk that inflation will be higher for longer is there.”

The IMF lifted its outlook for global inflation on Tuesday and now predicts it will slow from 8.8% in 2022 to 6.6% this year and 4.3% in 2024 — rates that are still above levels recorded before the pandemic. It didn’t offer an update for price trends in individual economies.

The Washington-based lender said signs are emerging that policy tightening is starting to cool demand and inflation, though the full impact is unlike to be seen until next year. 

“Until inflation has come down in a durable, lasting manner, central banks still need to tighten,” Adrian said.