Global inflation is expected to fall more slowly in the second half of the year, raising the prospect of interest rates “remaining elevated for longer,” the International Monetary Fund said on Tuesday.
The reason is the price of services, a broad category that includes everything from housing and haircuts to restaurants and medical care.
“Rising services prices are impeding deflationary momentum and complicating monetary policy normalization,” said a new IMF report released on Tuesday. “This raises the risks of rising inflation and the likelihood that interest rates will remain elevated for a longer period.”
The International Monetary Fund (IMF) logo is displayed outside its Washington headquarters. REUTERS/Yuri Gripas (REUTERS / Reuters)
Major central banks around the world are expected to continue cutting interest rates in the second half of this year, but the pace of cuts will vary depending on inflation trends in each country.
In the US, traders expect the Federal Reserve to start cutting interest rates in September.
Federal Reserve Chairman Jerome Powell on Monday issued another signal that the central bank is nearing the time to begin easing monetary policy, citing a recent rebound in inflation measures that beat expectations for the first quarter.
But he declined to give a specific timeline, saying, “We will take these decisions on a meeting-by-meeting basis and taking into account evolving data and the balancing of risks.”
Federal Reserve Chairman Jerome Powell participates in a conversation Monday at the Economic Club of Washington, D.C. (AP Photo by Manuel Balce Senator) (AP)
The IMF report warned that escalating trade tensions could increase the cost of imported goods through supply chains, raising inflation risks in the near term.
The IMF also noted that trade tariffs could have cross-border spillovers, triggering retaliatory measures and leading to a costly race to the bottom.
The IMF has recommended that in countries where risks of rising inflation are evident, central banks should refrain from premature monetary easing but be open to further tightening if necessary.
If the data suggests a durable return to the inflation target, the central bank should gradually cut interest rates, he said.
economic growth
The IMF's global economic growth outlook remains unchanged from its previous report in April, predicting growth of 3.2% in 2024 and 3.3% in 2025.
U.S. growth was revised down by 0.1 percentage point to 2.6% this year and is expected to slow to 1.9% in 2025 as the job market cools, consumer spending slows and fiscal policy begins to gradually tighten.
In the euro zone, the slowdown appears to have bottomed out. The IMF raised its growth forecast for the euro zone to 0.9% this year, citing stronger momentum in the services sector in the first half of the year. Growth is projected to rise to 1.5% in 2025.
The story continues
China is expected to lead emerging market growth this year, with the IMF predicting 5% expansion thanks to a recovery in consumer spending in the first quarter and strong exports.
But headwinds such as an aging population and slowing productivity growth are expected to see China's growth slow to 4.5% next year and continue to slow to 3.3% by 2029 in the medium term.
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