The faucet must continue to be closed. If some analysts considered it an opportunity for central banks to take a break from their monetary tightening after the collapse of banks in the United States and Switzerland in recent days, yesterday it was the Organization for Economic Co-operation and Development ( OECD) who gave his own version: the price of money must continue to rise.
“Underlying inflation remains persistent, supported by strong increases in service prices and cost pressures from tight labor markets. Inflationary pressures will force many central banks to maintain high interest rates well into 2024,” reads its economic forecast report.
At the subsequent press conference, the general secretary, Mathias Cormann, and the chief economist, Álvaro Pereira, explained their reasoning with the following arguments. The Silicon Valley Bank (SVB), intervened since Monday, had a very peculiar business model, in which it received short-term liquidity and invested in long-term fixed income without being hedged by rising rates. In short, a case of bad management.
Likewise, the current financial turmoil, which has spread to other regional banks such as First Republic Bank, is not systemic, unlike what happened with the 2008 crisis, which was very different. “Now there is more supervision and regulation, the entities are more capitalized and what happens is a psychological impact, which translates into a reduction in shares”, they commented.
The two representatives of the OECD, on the other hand, believe that the real priority must be the fight against inflation. Because the underlying is resilient and while the energy component has decreased, the services component continues to increase. For this reason, it is not only necessary for the central banks to act with more rate hikes, but for the states to abandon indiscriminate expansionary fiscal policies that are not focused on the weakest groups, since this higher expenditure is inflationary and ends up diluting ( or even going against) monetary policy.
Regarding growth forecasts, the OECD has partly improved its previous forecasts. His assessment of Spain stands out: compared to November, GDP growth for this year has risen by four tenths, which should end at 1.7%.
In this way, the Spanish economy will do better than other economies around it, such as France, Italy or Germany. Among the reasons, the OECD points to the resilience of the Spanish economic system, a very strong industrial sector and the recovery of the rest of the economies with which it has commercial relations.
When examining inflation, the data is much more ambiguous. Because in Spain it will go down this year, but “not as much as we expected” (from an average of 8.3% in 2022 to 4.2% in 2023). In 2024, inflation will continue to decrease but less and will be around 4%.
One of the factors weighing on this slow reduction is the particularly marked rise in Spain in underlying inflation, which will go from 3.8% in 2022 to 5% this year and 3.7% in 2024, much higher than the eurozone average (3%).
A final reference was for Emmanuel Macron. The OECD supported the French president in his plan to reform pensions. “Life expectancy has increased, we have better health and we must assume that we will need to work more”, said Cormann. “France must maintain these reforms”, he added.
A message that will not have gone unnoticed in Spain, where plans are also being studied to guarantee the sustainability of the system.
