Inflation to dog world economy in 2024, postponing rate cuts: Economists

BENGALURU - High inflation will dog the world economy in 2024, with three-quarters of over 200 economists polled by Reuters saying the main risk is that it turns out higher than they forecast, suggesting interest rates will also remain higher for longer.

Several central banks are still expected to begin cutting interest rates by the middle of 2024, but a growing number of economists surveyed are adjusting their views, pushing the more likely date into the second half of next year.

This is a significant change from expectations at the start of 2023. Then, some investment banks were predicting the United States Federal Reserve, which sets the tone for many others, would be cutting rates right around now.

Despite broad success in bringing inflation down from its highs – the easier bit – prices are still rising faster than most central banks would prefer, and hitting their inflation targets is likely to be tough.

The latest Reuters poll of over 500 economists taken between Oct 6 and Oct 25 produced 2024 growth downgrades and inflation upgrades for a majority of the 48 economies around the world surveyed.

A majority of 75 per cent of those who answered a separate question said the risk to these broadly upgraded inflation forecasts was skewed higher, with only 57 out of the 228 economists saying the risk was skewed lower.

The results follow news on Thursday that the US economy unexpectedly grew nearly 5 per cent, annualised, in the third quarter, underscoring how the strength of the world’s largest economy is setting it apart from most of its peers.

The survey results also follow a warning from European Central Bank (ECB) president Christine Lagarde, who said after the ECB snapped a 10-meeting tightening streak that “even having a discussion on a cut is totally, totally premature”.

While many central banks, including the Fed and the ECB, have presented a “higher for longer” narrative on rates for the better part of 2023, many economists and financial market traders have been reluctant to accept that view.

“I think all of us have to keep an open mind that maybe policy isn’t restrictive enough,” said BMO chief economist Douglas Porter.

“Our forecast is that the Fed has done enough and it doesn’t have to raise rates further, but I haven’t closed off the possibility we could be wrong and the Fed does ultimately have to do more.”

While most economists still say the Fed will cut by mid-year, the latest poll shows just 55 per cent backing that scenario compared with over 70 per cent in September.

The Reserve Bank of New Zealand, which often leads the interest rate cycle, was also forecast to wait until July to September 2024 before cutting.

The majority backing no cuts until the second half of 2024 has also grown stronger for the Reserve Bank of Australia, Bank Indonesia and the Reserve Bank of India.

Even the Bank of Japan, the outlier sticking to an ultra-loose policy through this entire round of inflation, is expected to abandon negative interest rates in 2024.

Crucially, most economists agree the first easing steps will not be the beginning of a rapid series of cuts.

Asked what would prompt the first cut by the central bank they cover, over a two-thirds majority, or 149 of 219 respondents, said it would be simply to make real interest rates less restrictive as inflation falls.

The remaining 70 said the first move would mark a shift towards stimulating the economy, suggesting only a minority expect a hard enough hit to demand and inflation to warrant a monetary response.

Global economic growth was forecast to slow to 2.6 per cent in 2024 from an expected 2.9 per cent in 2023.

“Central banks have had the highest rates in order to fight inflation... It’s certainly restraining activity, and it’s going to be a while before we get global growth above what has been its historical average,” said Citi global chief economist Nathan Sheets. REUTERS