What levers might central banks pull for the economy in 2024?

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Emma Charlton, Senior Writer, Forum Agenda

• There’s a widespread expectation for an improvement in the inflation outlook for 2024, according to the World Economic Forum’s Chief Economists survey.
• That should give central bank policy-makers more room to decide on policy.
• Even so, many are likely to wait for stronger evidence that inflation rates are moderating before choosing to lower their benchmark rates.

Central banks around the world are facing persistent headwinds and volatility in 2024.

That’s according to the World Economic Forum’s January 2024 Chief Economists Outlook, which also pointed to some positives including a moderation in inflationary pressures and advances in artificial intelligence (AI). And all these factors are in the mix for central bank policy-makers as they decide what to do in the coming months.

“Global inflation continues to ease,” the Forum report says, “propping expectations of mild ebbing in interest rates this year.”

The global headline rates of inflation are projected to reach 4.8%, a sharp decline from 5.9% in 2023 and 9.2% in 2022. Core inflation – a gauge that strips out often volatile factors like food and energy – is decelerating as well, and is forecast to reach 4.5% in 2024.

Inflation outlook is key

There’s a widespread expectation for an improvement in the inflation outlook for 2024, with the chief economists’ survey showing that expectations for high inflation are being pared back across all regions.

Moderate inflation expectations may give central banks more policy room. Image: Chief Economists Outlook

In the latest survey the majority of chief economists also expect labour markets to loosen in advanced economies – a higher number than in the September report. They also said financial conditions are likely to loosen as well in the advanced economies.

“The policy stance remains cautious on both sides of the Atlantic as policy-makers navigate challenging domestic and global conditions,” the report says. “The unusually high degree of uncertainty over economic and financial developments means the timing and extent of easing will pose a dilemma for policy-makers that continue to navigate trade-offs between tightening too much and too little.”

DISCOVER

How is the World Economic Forum improving the global financial system?

In 2024, central banks have a few levers they could pull to help them navigate economic conditions, including:

1. Interest rates

When we think of central banks, we often think first of interest rates. That’s because central banks around the world regularly raise and lower interest rates to stimulate or cool down the economy. Lower rates may encourage borrowing and spending, while raising rates can help to curb inflation.

There’s a broad expectation that an easing of inflationary pressures will allow central bankers – who’ve been raising rates in recent years – to start to think about lowering them. Chief economists were almost unanimous (93%) in expecting the pace of interest rate rises in inflation-prone economies to slow, according to the Forum’s September 2023 survey.

Even so, they will want to see evidence that inflation is under control before acting, according to the Financial Times, which says officials from the US Federal Reserve and the European Central Bank have both signalled that they are waiting to see on before acting on any rate cuts.

2. Forward guidance and communication

Central banks often use forward guidance to communicate their future policy intentions and affect market expectations around interest rates without having to raise or lower their benchmark rate. Clear communication about what policy actions are likely to be taken can influence expectations and guide economic behaviour.

In the UK, the headline rate of inflation is 4%, compared with a peak of more than 11% in 2022, and while policy-makers have said they want more evidence before taking action to cut rates, they have used their language to signal their intentions, choosing not to reiterate previous warnings that “further tightening” of policy might be needed.

3. Interaction with fiscal policy

Central banks may also take fiscal policies into account when approaching the economy and its growth. The Forum’s latest survey shows a cautious outlook among chief economists when it comes to the balance between global competition, fiscal stability, and industrial development.

These challenges need to be carefully navigated to ensure a balanced and sustainable economic environment, the report says.

Other items high on central banks’ agenda in 2024 are likely to be continuing work on digital currencies and incorporating climate risks – some are considering measures such as stress testing for climate-related financial risks.

Overall, the Chief Economists Outlook shows concern about global economic weakness, with 56% anticipating a global economic decline, balanced against the positive of abating inflationary pressures. This – combined with diverging growth patterns across regions – means that 2024 is likely to continue to be full of finely balanced decisions for central bank officials.