CNN, London —
The International Monetary Fund warned that persistent inflation could keep interest rates higher for longer than expected, increasing fiscal and financial risks around the world.
High prices for services such as haircuts, hotels and restaurants, and escalating trade tensions are pushing up inflation and raising the prospect of interest rates remaining high for the foreseeable future, the IMF warned on Tuesday in its latest World Economic Outlook.
The warning highlights that the global economy has yet to stabilise when it comes to inflation and explains why central banks have been cautious in cutting interest rates, as rising borrowing costs prolong the financial squeeze on households and businesses.
Last week, Federal Reserve Chairman Jerome Powell said US central bankers needed “greater confidence” that inflation was moving sustainably towards their 2% target before enacting their first rate cut.
Meanwhile, the Bank of England refrained from cutting interest rates last month, even as UK inflation slowed to the central bank's 2% target in May, but services inflation rose faster than expected.
The Bank of England stressed that “monetary policy will need to remain tight for an extended period until there are no longer any risks of inflation exceeding the 2 per cent objective.”
The IMF said in a report on Tuesday that it still expects major central banks to cut borrowing costs in the second half of the year.
The agency blamed high service prices for “impeding progress” in containing inflation generally. “The risks of persistent inflation in the services sector relate to both wages and pricing, given that labor costs make up a large part of the sector's costs,” it said.
“Escalating trade tensions could further increase short-term inflation risks due to higher costs of imported goods.”
The United States and the European Union have increased tariffs on Chinese-made electric vehicles in recent months over concerns that cheap Chinese imports could wipe out local jobs and strategic industries. The United States has also increased tariffs on a host of other products, including steel, batteries, semiconductors and critical minerals, from China, the world's second-largest economy.
The IMF sees the global economy growing 3.2% this year, in line with its April forecast, but the organization lowered its forecast for U.S. growth to 2.6%, 0.1% lower than its April forecast.
The economy, which includes the 20 countries that use the euro, is now expected to grow at a “moderate” 0.9 percent, 0.1 percentage point higher than forecast in April.
The IMF also revised up its 2024 growth forecasts for India and China, now seeing growth of 7% and 5%, respectively, from April's 6.8% and 4.6% estimates.
The agency will hold a press conference to discuss the report at 9 a.m. ET on Tuesday.