Optimism is rising for the growth prospects of the international economy this year and while inflation is estimated to remain at levels higher than the target, the central banks of the West are expected to proceed with reductions in lending rates.
While most major central banks were successful last year in taming sky-rocketing inflation rates with rapid rate hikes, a resilient global economy with strong employment and wage growth has kept alive risks of price pressures surging again.
Overall, 56% of economists polled said it was more likely that inflation would move higher than the average estimate for the rest of the year rather than lower. Also, despite the challenges and intense pressures, analysts estimate that the global economy will grow at a rate of 3.1%, faster compared to the previous forecast.
But even with that upgrade, many central banks are still expected to cut rates at least twice by year-end.
A few months ago, economists were expressing strong concerns about whether the US economy could absorb the unprecedentedly aggressive monetary policy cycle without falling into recession. Of course, the same concerns still exist for the world’s second largest economy, China.
However, economists upgraded growth forecasts for 24 of the top 48 economies surveyed. Of these, 13 were developed economies, where there were serious concerns about demand, and the remaining 11 were emerging economies. In contrast, forecasts worsened for 18 economies, while for six they remained unchanged.
Forecasts for the next moves by the major central banks remained unchanged, with economists expecting two rate cuts by the end of the year from the Federal Reserve and the Bank of England and three cuts from the ECB.
Given that growth has held up so far, what will determine the level of interest rates and their path will most likely be inflation. Even now, it is expected that most central banks will not have achieved their inflation targets before the end of the year.
“Risks are mounting…on international commodity prices, with shipping costs approaching 2021/2022 highs,” commented James Rossiter, head of macro strategy at TD Securities. “We don’t expect such a big jump in inflation this time around…But the threat of higher core inflation, combined with the persistently high cost of inflation, could slow rate cuts,” he added.
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