Renowned economist Jim O’Neill speculates that central banks will need to maintain interest rates at around 5% in major economies for a longer period than anticipated, even as inflation cools down.
The upcoming policy meeting in September is expected to see the U.S. Federal Reserve raise interest rates by another 25 basis points. However, market pricing suggests that rate cuts will begin in 2024, according to the CME Group’s FedWatch tool.
Market participants are closely monitoring the U.S. consumer price index for July, which will provide insights into the Fed’s future rate trajectory.
Economists anticipate a 0.2% month-on-month and 3.3% annual increase in the Thursday headline CPI, based on the Dow Jones consensus estimate. While this shows a slight rise from June due to higher gas prices, it remains significantly lower than the annual high of 8.5% recorded a year ago.
In July, core inflation, which excludes volatile food and energy prices, is projected to be 4.8% higher compared to the previous year. The euro zone and the U.K. have consistently experienced elevated core inflation levels, prompting central bankers to emphasize their commitment to maintaining high rates until inflation approaches their 2% targets.
Policymakers have pushed back on expectations of rate cuts, and O’Neill, currently a senior adviser at Chatham House and former chair of Goldman Sachs Asset Management, agrees that rate decreases are unlikely in the near future.
Speaking on CNBC’s “Squawk Box Europe,” O’Neill stated, “To address the challenge of declining core inflation and the accumulation of stimulus over the past decade, I believe it is necessary to keep rates around the 5% range in most developed countries. This will contribute to a more stable and balanced global economy.”
O’Neill also expressed confidence that the U.S. is well-positioned to avoid a recession, citing relatively stable inflation expectations.
He added, “Since the forces the Fed has been combating are starting to dissipate, it is reasonable to assume that this market sentiment and response will continue for a while. I believe the trend in inflation is improving, and in fact, the next positive developments are likely to occur in Europe rather than the U.S., as Europe is just beginning to experience such changes.”
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