The International Monetary Fund has warned that central banks need to keep interest rates at high levels for another 12 months in order to defeat inflation.
The Fund has called on central bankers “to pay the most attention” in order to learn from history. It is believed that it can take “years” to “resolve” inflation, by reducing its rate to what it was before the shock.
In a report prepared for the IMF, economists Anil Ari & Lev Ratnovski warn: “Countries in the past have celebrated victories over inflation by easing policy too soon in response to a temporary decline in price pressures. This was a big mistake, because inflation quickly returned.
In the 1970s, when oil prices were soaring, many countries made the same mistake.
The IMF stated: “Central banks are right to warn the inflation battle is far from being over, even though recent readings have shown a welcome moderating of price pressures.”
The announcement comes as Bank of England officials try to counter investor expectations that interest rates in Britain could drop as early as next year following a sharp fall in inflation to 4.6%.
Andrew Bailey is the Bank of England Governor. He has stated that it’s “too soon” to think about rate cuts. He also stressed the importance of keeping borrowing costs at 5,25pc in order to bring inflation back to Thread needle’s 2pc goal.
Megan Greene is a member of Bank of England’s Monetary Policy Committee. She said on Thursday that she was concerned about the “persistence of inflation” due to the high growth in pay and the rising prices of services.
She said: “To return inflation sustainably back to target, the MPC needs to balance the risks of doing too little and too much.”
These risks have become more balanced, in part because activity has decreased since the beginning of this summer. The data on output remain mixed and I am still more concerned about inflation persistence.
In its report, the IMF stated: “History has taught us that inflation persists.”
In the 1970s only 60% of countries were able to control inflation within five years. Those who succeeded in doing so did so by maintaining interest rates high on average for more than three years.
The Bank of England only began to raise rates two years ago. Borrowing costs should stay high for one more year to ensure inflation is truly defeated.
The IMF also warned governments to avoid major tax cuts or spending sprees. They said that central banks are leading the fight against inflation and should focus on these lessons.The government must not complicate the task of the monetary authorities by adding more price pressures through a loose fiscal policy.
Jeremy Hunt announced last week what he called the “biggest business tax reduction in modern British History”. The Chancellor has claimed that making an investment tax credit permanent will increase growth without increasing prices.
A Bank of England survey found that business leaders expect investment to decrease by 10% in the last quarter of the year because of high interest rates, despite the Chancellor’s attempts to increase it.The Bank of England is also under pressure to maintain rates as businesses expect that inflation will remain above 3pc for three years.
The IMF warned that fragmentation of the global economy could derail hopes for a major growth in renewable energies and electric vehicles.
Analysts warn that lithium and cobalt supply may be affected if a Russia- and China-led economic bloc separates from the West.
IMF: “Critical Minerals may one day be as important for the world’s economy as Oil is today.”
Fragmentation of the mineral market could increase the cost and delay climate policies.
IMF is concerned that if the world were to split, investment in renewable energies could drop by a quarter in 2030, compared with current predictions, and the production of electric cars could be a third lower than expected.