The tightening of monetary policy, Moody’s in its global macro outlook titled ‘Global economic risks persist despite recent positive surprises’, said will have a drag on economic activity and employment in most major economies. “We forecast G-20 global economic growth will downshift to 2.0 per cent in 2023 from 2.7 per cent in 2022, and then to improve to 2.4 per cent in 2024,” it said in the outlook report.
Inflation, the report said, will continue to moderate, but a sustained decline to central bank targets is not guaranteed.
For instance, inflation in the US moderated to 6.4 per cent in January from 6.5 per cent in December, and 7.1 per cent the previous month but still is way above the 2 per cent target.
The US central bank’s policy rate is now in a target range of 4.50-4.75 per cent, the highest level in 15 years, and notably, it was near zero in the early part of 2022. Raising interest rates is a monetary policy instrument that typically helps suppress demand in the economy, thereby helping the inflation rate decline.
The report envisions inflation across advanced economies remaining above central bank targets for the better part of 2023 and 2024
“Our expectation that inflation will continue to fall through next year across most G-20 economies is contingent on a moderation in demand facilitated by central bank actions,” Moody’s said, adding that central banks will keep interest rates restrictive for longer than the financial markets expect.
“While there is a clear sense that the end to monetary policy tightening is near, how many more interest rate increases will be appropriate and how long rates will remain restrictive is unknown. The Fed and other central banks would be forced into even more aggressive policy tightening if loosening financial conditions undermine their efforts to subdue aggregate demand,” it added.
