Central banks should maintain rates of interest excessive for for much longer

Major central banks will have to keep rates high for much longer than some investors expect, Gita Gopinath, first deputy general manager of the International Monetary Fund, told CNBC on Tuesday.

“We also have to acknowledge that central banks have done some work… Still, we think they should continue to tighten and, importantly, stay at elevated levels for a while longer,” Gopinath told CNBC’s Annette Weisbach at the European Central Bank Forum in Sintra, Portugal.

“This is different than what several markets are expecting, for example, which is that interest rates are going to come down very quickly. I think they have to be on hold for a lot longer,” she said.

The ECB started raising interest rates in July 2022 and has since increased its key interest rate from -0.5% to 3.5%. The US Federal Reserve, meanwhile, started a cycle of rate hikes in March 2022 but, unlike Europe, opted for a pause this month. Still, Fed Chair Jerome Powell has hinted that there could be at least two more rate hikes this year.

A survey of US economists in late May found they had pushed back their expectations of a Fed rate cut from the last quarter of this year to the first quarter of 2024. In a note to clients on Friday, Nomura said it expects both the ECB and the Bank of England to announce rate cuts in about a year.

For the IMF, however, it is clear that reducing inflation must have absolute priority.

Gita Gopinath, First Deputy General Manager of the International Monetary Fund (IMF), spoke to CNBC at the ECB Forum in Portugal.

Bloomberg | Bloomberg | Getty Images

“Inflation is taking too long to get back to target, which means central banks must remain committed to fighting inflation, even if that means risking weaker growth or a much more pronounced slowdown in the labor market,” Gopinath said.

In the case of the ECB, the central bank raised its expectations for eurozone inflation at its last meeting in June. It now expects headline inflation to be 5.4% this year, 3% in 2024 and 2.2% in 2025.

Gopinath described the current macroeconomic picture as “very uncertain”.

Analysts at Goldman said in a note on Friday they expect the Fed to make the first rate cuts in the second quarter of next year and the ECB in the final quarter of 2024.

Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management, told CNBC’s Street Signs Europe on Tuesday that when it comes to rate hikes, it simply boils down to the fact that we don’t know “when enough will be enough.”

Meanwhile, ECB Governing Council member Mārtiņš Kazāks also told CNBC he believes markets are pricing in rate cuts too early.

“Right now, I think the markets are making the mistake of believing interest rates are going to go down much, much faster, which I don’t think is consistent with where we are right now,” Kazāks said at the Sintra forum.

“First of all, next year is way too early. Personally, I would envision rate cuts only starting once we see inflation fall significantly and sustainably below our 2% target.”

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