Central banks face a “difficult balancing act” as they start lowering interest rates around the world in the face of falling inflation, the head of the IMF said Friday.
Central banks on both sides of the Atlantic have cut rates this year, with the US Federal Reserve reducing its benchmark lending rate by half a percentage point on Wednesday in a bid to boost demand, a few months after the European Central Bank (ECB) began lowering its key rate.
But as they do so they must tread carefully, International Monetary Fund Managing Director Kristalina Georgieva said at an event with ECB President Christine Lagarde in Washington.
“Central banks face a difficult balancing act,” Georgieva said. “They must ensure that inflation sustainably returns to target and remains there while avoiding the risk of excessively tight policies.”
“While clearly weaker than we would have wanted, economic activity has been remarkably resilient,” she added. “While inflation is retreating, rates are going down. Recession appears to be unlikely.”
The ECB has cut rates by a quarter percentage point twice already this year, while the Bank of England voted on Thursday to leave rates unchanged after just one cut, as UK inflation remained above target.
Lagarde said Friday that the ECB’s “determined policy actions have successfully kept inflation expectations anchored,” adding that inflation remains on track to hit its two percent target in the middle of next year.
“But is the uncertainty gone? No, there is still plenty of that around,” she said.
