The top economist of the International Monetary Fund predicts that inflation will “remain high [next year]” and that it will be an “environment where people’s wages will suffer more.”
The chancellor’s mini-budget “complicated matters” for the Bank of England as it fought to reduce inflation, the head economist of the International Monetary Fund told.
Pierre-Olivier Gourinchas cautioned in an interview at the IMF’s annual meetings in Washington that the following years would be “not very pleasant” for the global economy.
He added that the tax cuts announced by Kwasi Kwarteng at the end of last month, when the Bank was attempting to raise interest rates, posed a “challenge” for the UK economy.
“We were concerned when the mini-budget was announced at the end of September,” he remarked.
“While the impulse to protect households and businesses and try to stimulate growth… are great objectives that we would strongly support, there was a sense that the budget, as announced, suggested a very stimulative effect in the short term, which would have complicated the Bank of England’s efforts to reduce inflation,” Mr. Gourinchas added.
According to him, the IMF is pleased that the chancellor will present further proposals in his medium-term budget plan later this month, and it will evaluate them when they arrive.
However, the comments are made amid a heated dispute over whether the mini-budget was or was not responsible for some of the subsequent disruptions in the money markets.
Business Secretary Jacob Rees-Mogg stated earlier on Wednesday that assigning blame to the mini-budget was speculative.
Mr. Gourinchas stated that the market disruptions in the United Kingdom, which have produced problems for pension plans dependent on derivative methods that can no longer work due to rapid spikes in interest rates, were part of a larger trend.
“As interest rates rise, it becomes apparent that certain areas of the financial markets may not be optimally positioned for higher rates; therefore, they must unwind trades and reposition themselves. This can occasionally be accompanied by liquidity pressures and financial weaknesses, he explained.
Mr. Gourinchas cautioned, however, that the economic “worst was yet to come” for both the global economy and the United Kingdom.
“Inflation will remain elevated [next year],” he warned. “We will be in a scenario where people will feel greater pain in terms of their incomes and growth – a third of global output is in the contraction zone, and two consecutive quarters have had negative growth.
People will remark, ‘Oh, this is not working,’ since inflation will not return to target and growth will be below expectations. We must do something different. We must alter the direction of monetary policy.'”
Mr. Gourinchas said, “This is why we are saying no, hold on a second. We are aware that this will take some time. We are aware that this will not be a pleasant experience, but central banks must take action to reduce inflation.”
