ECB Must Narrow Interest-Rate Gap With Fed, OECD Says

“Real wages are falling in many countries, slashing purchasing power,” said

Alvaro Pereira,

the OECD’s acting chief economist. “If inflation is not contained, these problems will only become worse. Thus, fighting inflation has to be our top policy priority right now.”

In its latest forecasts for the global economy, the OECD said it expects inflation to remain especially stubborn in Europe following Moscow’s decision to throttle natural-gas supplies to undermine Western support for Kyiv.

“Inflation will remain high, and the ECB will have to act more forcefully,” said Mr. Pereira.

The OECD said the eurozone’s central bank should raise its key interest rate from 1.5% to between 4% and 4.25% by the middle of next year, a much higher peak than that widely anticipated by investors. In its latest report on the global economic outlook,

BNP Paribas

said it expects the ECB’s deposit rate to peak at 3%.

The ECB has been slower to raise interest rates than the Federal Reserve, whose rate stands at between 3.75% and 4%. Because of higher energy prices, inflation in the eurozone has overtaken that in the U.S. and the bloc’s common currency has lost ground against the dollar.

The research group said it now expects the eurozone’s inflation rate to average 6.8% in 2023, up from the 6.2% it projected in September. By contrast, it expects inflation in the U.S. to average 3.5% in 2023, little changed from its previous forecast, and said the Fed should raise its key rate to 5.25%, in line with investor expectations.

Mr. Pereira said Europe would need higher interest rates to support the euro’s exchange rate against the dollar and prevent a larger rise in prices of imported goods and services due to the currency’s weakness.

The ECB’s key rate last stood at 4.25% in early October 2008, while the Fed last set its key rate at 5.25% in 2006.

The OECD estimates that in the three months through September, real wages were more than 2% lower than a year earlier in the U.S., the U.K. and Italy, and more than 4% lower in Germany, as wage gains have failed to keep up with rising prices.

Despite forecasting significant further rate rises by the world’s leading central banks, the OECD said the very large savings accumulated by households during the pandemic and continued government support to households and businesses to help cover soaring energy bills would ensure the global economy doesn’t slide into recession next year. As in September, the research group expects global output to rise 2.2% in 2023, followed by a 2.7% expansion in 2024.

However, the OECD expects the German and British economies to contract next year, while it forecasts growth of 0.5% in the U.S. By contrast, it expects China’s economy to accelerate after a weak 2022, although that will depend on the easing of Covid-19 restrictions there.

“If strict lockdowns were to continue and affect a big chunk of the Chinese economy, the risk is they’ll grow even less,” Mr. Pereira said.

Europe’s economic outlook for next year is also highly uncertain, the OECD said. While mild October weather and high levels of gas storage mean it is likely Europe will avoid energy rationing, it faces another difficult battle to make up for lost Russian gas supplies.

“We are more concerned about winter 23/24 than winter right now,” said Mr. Pereira. “The main message is that the energy crisis is here to stay.”

One reason for that concern is China’s rebound. While the world’s second-largest economy has grown slowly in 2022, its demand for liquefied natural gas has been low, allowing Europe to build up its stocks. European buyers might face more competition next year.

“If there’s low LNG availability because China starts recovering, this is going to be very problematic,” said Mr. Pereira.

Write to Paul Hannon at paul.hannon@wsj.com

“Real wages are falling in many countries, slashing purchasing power,” said

Alvaro Pereira,

the OECD’s acting chief economist. “If inflation is not contained, these problems will only become worse. Thus, fighting inflation has to be our top policy priority right now.”

In its latest forecasts for the global economy, the OECD said it expects inflation to remain especially stubborn in Europe following Moscow’s decision to throttle natural-gas supplies to undermine Western support for Kyiv.

“Inflation will remain high, and the ECB will have to act more forcefully,” said Mr. Pereira.

The OECD said the eurozone’s central bank should raise its key interest rate from 1.5% to between 4% and 4.25% by the middle of next year, a much higher peak than that widely anticipated by investors. In its latest report on the global economic outlook,

BNP Paribas

said it expects the ECB’s deposit rate to peak at 3%.

The ECB has been slower to raise interest rates than the Federal Reserve, whose rate stands at between 3.75% and 4%. Because of higher energy prices, inflation in the eurozone has overtaken that in the U.S. and the bloc’s common currency has lost ground against the dollar.

The research group said it now expects the eurozone’s inflation rate to average 6.8% in 2023, up from the 6.2% it projected in September. By contrast, it expects inflation in the U.S. to average 3.5% in 2023, little changed from its previous forecast, and said the Fed should raise its key rate to 5.25%, in line with investor expectations.

Mr. Pereira said Europe would need higher interest rates to support the euro’s exchange rate against the dollar and prevent a larger rise in prices of imported goods and services due to the currency’s weakness.

The ECB’s key rate last stood at 4.25% in early October 2008, while the Fed last set its key rate at 5.25% in 2006.

The OECD estimates that in the three months through September, real wages were more than 2% lower than a year earlier in the U.S., the U.K. and Italy, and more than 4% lower in Germany, as wage gains have failed to keep up with rising prices.

Despite forecasting significant further rate rises by the world’s leading central banks, the OECD said the very large savings accumulated by households during the pandemic and continued government support to households and businesses to help cover soaring energy bills would ensure the global economy doesn’t slide into recession next year. As in September, the research group expects global output to rise 2.2% in 2023, followed by a 2.7% expansion in 2024.

However, the OECD expects the German and British economies to contract next year, while it forecasts growth of 0.5% in the U.S. By contrast, it expects China’s economy to accelerate after a weak 2022, although that will depend on the easing of Covid-19 restrictions there.

“If strict lockdowns were to continue and affect a big chunk of the Chinese economy, the risk is they’ll grow even less,” Mr. Pereira said.

Europe’s economic outlook for next year is also highly uncertain, the OECD said. While mild October weather and high levels of gas storage mean it is likely Europe will avoid energy rationing, it faces another difficult battle to make up for lost Russian gas supplies.

“We are more concerned about winter 23/24 than winter right now,” said Mr. Pereira. “The main message is that the energy crisis is here to stay.”

One reason for that concern is China’s rebound. While the world’s second-largest economy has grown slowly in 2022, its demand for liquefied natural gas has been low, allowing Europe to build up its stocks. European buyers might face more competition next year.

“If there’s low LNG availability because China starts recovering, this is going to be very problematic,” said Mr. Pereira.

Write to Paul Hannon at paul.hannon@wsj.com