Central banks must avoid urge to back off inflation fight - IMF economist

Record ID: 1682669

  • Title: Central banks must avoid urge to back off inflation fight - IMF economist
  • Date: 26th July 2022
  • Summary: WASHINGTON, D.C., UNITED STATES (JULY 26, 2022) (REUTERS) WIDE VIEW OF IMF CHIEF ECONOMIST PIERRE-OLIVIER GOURINCHAS BEING INTERVIEWED (SOUNDBITE)(English) IMF CHIEF ECONOMIST PIERRE-OLIVIER GOURINCHAS SAYING: "Now you are right to highlight that central banks might get a little bit nervous. I mean, it's never very pleasant to hike interest rates and to, you know, take dem
  • Embargoed: 9th August 2022 22:50
  • Keywords: IMF IMF chief economist International Monetary Fund global economy global recession
  • Location: WASHINGTON, D.C., UNITED STATES
  • City: WASHINGTON, D.C., UNITED STATES
  • Country: USA
  • Topics: Economic Events,United States
  • Reuters ID: LVA001462526072022RP1
  • Aspect Ratio: 16:9
  • Story Text:Global central banks may get "antsy" about the swiftness of economic pain brought on by monetary tightening to fight inflation and be tempted to cut rates before the job is done, the International Monetary Fund's chief economist said on Tuesday (July 26).
    That would be a huge mistake, prolonging the agony of inflation, IMF research director Pierre-Olivier Gourinchas told Reuters in an interview.
    Gourinchas said rate hikes like the one expected from the Federal Reserve on Wednesday are already raising borrowing costs and softening demand -- along with households pulling back spending. That process needs to continue until inflation rates are back "within sight" of annual central bank targets of around 2%, he added.
    The IMF cut its global outlook on Tuesday, warned that monetary tightening, along with spillovers from the war in Ukraine and COVID-19 lockdowns in China could push the global economy to the brink of recession in the coming months.
    "And so central banks might be a little bit antsy about this and this is why when we look at the next year or so this is really going to be an environment that will test the mettle for central banks around the world," Gourinchas said. "Will they be really ready to stay the course and keep their eyes on inflation and bringing it down?"
    If they do start easing policy before inflation is tamed, Gourinchas said there could be a repeat of the early 1980s, when the Federal Reserve backed off of monetary tightening as unemployment mounted in 1980, only to be forced into punishing rate hikes later that year to finally crush inflation. This precipitated a long and painful recession in 1981 and 1982 -- at that time the worst since World War Two.
    But unlike the Paul Volcker era, the central banks do not need to apply "shock therapy" to quell inflation but navigate a path of returning to a neutral policy stance, he said, adding: "This is not about inflicting unnecessary pain on on the U.S. economy or other economies."
    But if inflation persists, and doesn't respond to withdrawal of support in a reasonable time, central banks "may have to push beyond neutral in a number of cases," which may cause recessions.
    (Production: Julio-Cesar Chavez, Colette Luke)
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