Slowing momentum on disinflation could further delay interest rate cuts, warns IMF 

Fund warned that slowdown in falling inflation signalled bumps along the path

The IMF also warned that wage growth, which it said reflected a "catch-up of real wages" following a period of high inflation, could make it difficult for firms to moderate price increases if combined with weak productivity. (AP Photo/Andrew Harnik, File)

Slowing momentum in the fight against inflation could further delay the easing of interest rates, the International Monetary Fund (IMF) has warned. 

In an update to its World Economic Outlook, the Washington-based fund said that stubborn inflation in the services sector could keep interest rates higher for longer, warning that "the momentum on global disinflation is slowing, signalling bumps along the path."

The IMF also warned that wage growth, which it said reflected a "catch-up of real wages" following a period of high inflation, could make it difficult for firms to moderate price increases if combined with weak productivity. With profit margins already squeezed, the IMF said this could lead to further stickiness in wage and price inflation. 

It also warned that escalating trade tensions could further raise near-term risks to inflation by increasing the cost of imported goods along the supply chain. This has been further exacerbated by the potential of another Trump presidency, with the Republican hopeful promising a return to protectionist trade policies, including a 10% tariff on all US imports, if successful in the next election. 

"The risk of elevated inflation has raised the prospects of higher-for-even-longer interest rates, which in turn increases external, fiscal, and financial risks," the IMF said, adding that strong dollar pressure arising from rate disparities could impede plans to ease monetary policy, adversely impacting growth. 

ECB rate cuts

The European Central Bank (ECB) will meet again this week following its first rate cut since embarking on an aggressive campaign to tame rising inflation, however, they are not expected to cut rates any further. 

Despite this, analysts are likely to watch closely for any clues from President Christine Lagarde on prospects for the next meeting in September.

The IMF kept its 2024 global real gross domestic product growth forecast unchanged from April at 3.2% and raised its 2025 forecast by 0.1 percentage point to 3.3%. 

It expects the Euro area to grow by a modest 0.9%, driven by stronger momentum in services and higher-than-expected net exports in the first half of the year. 

Eurozone growth is projected to rise to 1.5% in 2025, underpinned by stronger consumption on the back of rising real wages, as well as higher investment as monetary policy loosens further throughout the year.

It said the global economy is set for modest growth over the next two years amid cooling activity in the US, a bottoming-out in Europe and stronger consumption and exports for China.