(Bloomberg) — Market expectations for rapid interest-rate cuts are a bit premature because the battle against inflation isn’t yet over, International Monetary Fund official Gita Gopinath said.
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Speaking at the World Economic Forum in Davos, the fund’s first deputy managing director said that even after sharp hikes in borrowing costs in the last two years, the job is still not done as labor markets remain tight on both sides of the Atlantic.
“The markets are expecting central banks to cut rates pretty aggressively — I think that’s a bit premature to make that conclusion,” she said. “We should expect rates to come down some time this year, but based on the data we see right now, we expect this to be more likely in the second half of this year.”
Her remarks chime with those of global monetary officials who have pushed back on investor expectations for aggressive cuts in borrowing costs. Gopinath observed that economies are holding up in the face of tight conditions, making the chances of a deep recession less likely.
“We have households and corporations with stronger balance sheets and we’ve seen effects but we’ve also seen resilience; Labor markets are slowing but at a much more gradual pace,” she said. “We feel like a soft landing scenario — the probabilities have gone up quite a bit because we’ve had inflation come down without needing that much of a loss in terms of economic activity.”
In the longer term, Gopinath said policy rates will be on average higher than in the period after the global financial crisis, when central banks were trying to boost inflation.
Speaking on the same panel, European Central Bank Governing Council member Francois Villeroy de Galhau said economic transformations including the fight against climate change will mean higher rates in the longer term. He said the ECB’s rates could be at a “new normal” around 2% on average through the cycle.
Villeroy refused to be drawn on when exactly the ECB will cut borrowing costs, after saying in recent weeks the first reductions in borrowing costs should come this year.
“It’s too early to declare victory, I completely agree with Gita that the job is not yet done,” Villeroy said. Rates “shouldn’t be higher than today and barring major surprises — we look at the Middle East — our next move will be a cut probably this year.”
He also agreed with Gopinath on the prospects for economic growth.
“What we can see on both sides of the Atlantic is something like a soft landing,” Villeroy said.
(Updates with soft landing comments in fifth paragraph)
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