Inflation’s Impact on Dog World Economy Next Year, Delaying Rate Cut Calls – Reuters

By Hari Kishan

BENGALURU – High inflation will remain a significant challenge for the global economy next year, as three-quarters of over 200 economists surveyed believe the primary risk is that inflation could exceed their forecasts. This scenario suggests that interest rates are likely to remain elevated for an extended period.

While many central banks are expected to begin reducing interest rates by mid-2024, a growing number of economists are revising their predictions, pushing the anticipated timeline for rate cuts further into the second half of the year.

This marks a notable shift from early 2023, when some investment banks forecasted that the U.S. Federal Reserve would start cutting rates around this time.

Despite progress in lowering inflation from its peak levels, price increases remain above what most central banks would find acceptable, complicating efforts to meet inflation targets.

The latest poll of over 500 economists conducted between October 6 and October 25 revealed downgrades in growth expectations for 2024 and upgrades in inflation forecasts for the majority of the 48 economies examined.

A significant 75% majority, comprising 171 out of 228 respondents to a separate question, indicated that the risks associated with the revised inflation forecasts skewed higher. Only 57 respondents anticipated lower inflation.

These insights come on the heels of unexpected strong growth in the U.S. economy, which expanded nearly 5% on an annualized basis in the third quarter, highlighting its robust performance relative to many other nations.

The survey results also coincide with comments from European Central Bank President Christine Lagarde, who stated that discussions about interest rate cuts are "totally, totally premature" following the ECB’s decision to end a 10-meeting streak of tightening.

Many central banks, including the Fed and the ECB, have been conveying a "higher for longer" stance on interest rates throughout the year. However, economists and financial market participants have shown reluctance to fully accept this perspective.

Douglas Porter, chief economist at BMO, emphasized the need for an open mind regarding potential policy adjustments, stating that while he believes the Fed’s current stance is sufficient, the possibility of needing further actions remains.

While the majority of economists still anticipate Fed cuts by mid-2024, the latest poll shows that support for this scenario has dropped to 55% from over 70% in the previous month.

The Reserve Bank of New Zealand is also forecasted to wait until the July-September period of 2024 before implementing cuts.

Support for delaying cuts until the second half of 2024 has also strengthened among the Reserve Bank of Australia, Bank Indonesia, and the Reserve Bank of India. Even the Bank of Japan, which has maintained an ultra-loose policy during the inflation cycle, is expected to end its negative interest rates next year.

Notably, most economists agree that the initial steps toward easing will not lead to a rapid sequence of cuts. When asked about the factors that would trigger the first cut by their respective central banks, over two-thirds of respondents indicated it would primarily aim to make real interest rates less restrictive as inflation declines. The remaining participants expected the first move to signify a shift toward economic stimulation, suggesting that only a minority foresee a scenario requiring a significant monetary response to changes in demand and inflation.

Global economic growth is projected to slow to 2.6% next year, down from an expected growth of 2.9% this year.

Nathan Sheets, global chief economist at Citi, remarked on the implications of high interest rates on economic activity, noting that "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."