IMF Warns Central Banks of Premature Interest Rate Cuts


The IMF has warned central banks that they need to take a cautious approach to cutting interest rates this year, as market expectations could potentially trigger another round of inflation.

Gita Gopinath, the first deputy managing director of the IMF, stated that inflation is expected to decline less sharply than last year due to tight labour markets and high services inflation in the US, euro area, and elsewhere.

Gopinath emphasised the need for caution, highlighting that the challenge of managing inflationary pressure is not yet over. She argued that official interest rates should not be reduced until the second half of the year to avoid solidifying expectations of further cuts, which could be counterproductive. These comments follow the rise in UK inflation to 4% in December from November’s 3.9%.

Economists have suggested that, barring another major shock, interest rates are likely to have peaked, indicating they can only decrease from here. However, many have noted that market pricing seems overly optimistic regarding expectations of interest rate cuts. Central Banks are expected to adopt a slower approach to ensure a sustained decline in inflation, amid concerns that moving too quickly might necessitate further rate increases later.

The above is for educational purposes only and does not constitute advice. You should always contact your advisor for a personal consultation.

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