Potential energy, food supply disruptions could create new inflationary pressures: OECD chief economist

By Nuran Erkul

LONDON (AA) – As the global economy continues to confront the dual challenge of persistent inflation and low growth, potential disruptions in energy and food supplies could create new upward pressures on inflation, according to the chief economist of the Organization for Economic Co-operation and Development (OECD).

In an interview with Anadolu, Clare Lombardelli emphasized that central banks need to continue restrictive monetary policy until there are clear signs that inflationary pressures have “durably abated.”

Major central banks have been hiking interest rates for almost two years to tackle inflation.

Monetary policy was right by “acting swiftly and decisively” against increasing inflation, according to Lombardelli.

“The persistence of inflation is a key concern. Greater inflation persistence would require further tightening of monetary policy that would weigh on the economy but also increase the likelihood of sudden and significant repricing of financial assets as financial market reassess risk and returns,” she said.

Lombardelli noted that energy markets remain tight and there is potential for further disruptions to oil, coal and gas supplies, as well as a resurgence of food prices and shortages that could worsen food security.

“Overall, given that food and energy prices have a large weight in the consumer price indices of many countries, there is reason to worry about new upward pressures to inflation,” she said.

Restrictive monetary policy needs to continue “until there are clear signs that underlying inflationary pressure are durably abated,” she added.

“This is likely to limit scope for any policy rates reductions until well into 2024 in most advanced economies,” Lombardelli noted.

“Some additional rate rises could still be needed where underlying inflation pressure are particularly persistent, but policy rates appear to be at or close to their peak in most economies.”

The uncertainty over the strength and speed of monetary policy is also a further concern, and though the impact of monetary policy is becoming more visible in terms of bank lending standards, slowing credit growth, sharp falls in new loans for house purchases and asset prices, the global economy is yet to feel the full effects of high interest rates, according to her.

“We expect that the full effects from the quick and globally synchronized tightening of monetary policy to continue to shape growth prospects well into 2024,” Lombardelli added.

High interest rates are expected to work their way through economies as inflation is projected to moderate gradually over 2023 and 2024, but inflation is still expected to remain above central bank targets in most economies, she said.

- ‘All countries face mounting spending pressures’

Governments are facing the challenge of lowering inflation and adjusting fiscal policy support while reviving sustainable growth, Lombardelli said.

“Fiscal policy needs to be well-aligned with monetary policy and avoid fueling demand in times of elevated inflation but also to rebuild fiscal buffers,” she said.

“Governments do need to be taking this very seriously. They need to confront the trade-offs and the difficult policy choices, and prepare credible, multiyear plans on how they will navigate their public finances through these pressures.”

She said all countries are facing mounting spending pressures and therefore need to act.

However, the rise in debt distress among lower-income countries is worrying, Lombardelli said, pointing out that this makes it urgent for creditor countries and institutions to take joint action to ensure that debt burdens are sustainable and reduce the risk of significant setbacks to development.

- China ‘a key risk’

After a long spell of COVID-19 shutdowns, the reopening of the Chinese economy is taking longer than expected.

“A sharper-than-expected slowdown in China has become a key risk and would weigh on growth in main trading partners, but would likely transmit through tighter financial conditions due to a repricing of financial risks,” Lombardelli noted.

Other countries’ exposure to the slowdown in China depends on the share of their exports, she said.

However, she added, given that such a slowdown would likely also change global financial conditions, “there is no guarantee that countries that trade less with China would see no impact.”

China’s biggest trade partners are South Korea, Japan, the US, Australia, Russia, Germany, Malaysia and Brazil.

- ‘Fiscal discipline important for Turkish economy’

Lombardelli said the OECD projects the Turkish economy to grow 4.3% this year, but the figure will drop to 2.6% next year.

“Tighter financial conditions, fiscal consolidation and high inflation will moderate household consumption. However, investment growth will remain elevated due to ongoing reconstruction activity following the earthquakes at the beginning of this year,” she said.

“Inflation will be on a downward path but, nevertheless, we project it to be around 40% in 2024.”

Türkiye’s annual inflation rate was 61.53% in September, up from 58.94% in August, according to data released by the country’s statistical office last week.

Lombardelli noted that steps towards fiscal consolidation currently being taken by the Turkish government’s new economic team are important to put the economy back on a sustainable path.

Türkiye has been shifting toward orthodox economy policies, with the Central Bank raising its policy rate by 500 basis points to 30% in September, meeting market forecasts.

“Without such measures, the deficit would have steeply increased. It is important that fiscal discipline is restored. Prudent fiscal policy has been an important policy anchor over the past two decades in Türkiye,” she said.

Lombardelli pointed out that the Turkish Central Bank has said it remains “determined to tighten monetary policy as much as needed until a significant improvement in the inflation outlook is achieved.”

“This is welcome. Inflation remains stubbornly high and inflation expectations are unanchored. Structural reforms can support the current efforts to stabilize the macroeconomic framework and raise long-term growth potential,” she added.