Jim O’Neill, former chief economist at Goldman Sachs Group, in Italy in 2019.

Alessia Pierdomnico | Bloomberg via Getty Images

Veteran economist Jim O’Neill says that even if inflation eases, central banks will need to keep interest rates in major economies around 5% for longer than the market expects.

US Federal Reserve It is widely expected to hold interest rates steady at its next policy meeting in September, according to CME Group’s Fedwatch tool, but market pricing suggests the central bank will start cutting in 2024.

Traders will closely watch the post-July US consumer price index on Thursday for hints on the Fed’s future rate trajectory.

Economists expect Thursday’s headline CPI to be up 0.2% month-over-month and 3.3% annually, according to Dow Jones consensus estimates. While this indicates a modest increase from June as a result of higher gas prices, it is well below the four-decade high of 8.5% annually.

Jim O'Neill says rates in major economies will need to be kept around 5% even if inflation eases

Core inflation, which excludes volatile food and energy, remains firm and is expected to settle at 4.8% year-on-year in July. Core readings in the euro zone and the UK have also consistently remained well above target, prompting central bankers to reiterate their commitments to keep rates high as long as necessary to bring inflation down to their 2% target.

Policymakers have largely pushed back expectations of a rate cut, and O’Neill, senior advisor at Chatham House and former chairman of Goldman Sachs Asset Management, agreed that a cut is still a long way off.

He told CNBC’s “Squawk Box Europe” , I think that’s right.”

“I don’t quite agree with the idea that, in my view, rates automatically have to start coming down again in order to have a more balanced world in a sustainable way. We need to keep rates around 5% in most developed regions. world, because they must have some kind of positive relationship with the level of inflation if we want the level of inflation to be kept permanently stable.”

O’Neill also suggested that the US is “well positioned to avoid a recession,” noting that inflation expectations remain fairly stable.

“Given that some of the forces the Fed has been fighting are beginning to fade, I think it’s fair to assume that certainly this mood and this reaction of the markets will probably continue for quite some time,” he added.

“I think the inflation trend is improving. In fact, I think the next turning point will probably be more good news for Europe rather than the US because we’ve had a lot in the US recently and it just started is in Europe.”


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