"Loosening prematurely could risk a sharp resurgence in inflation once activity rebounds, leaving countries susceptible to further shocks which could de-anchor inflation expectations," they added.
The disconnect was on show on Wednesday when the U.S. Federal Reserve raised its policy rate and Fed Chair Jerome Powell reiterated that the central bank does not plan to cut rates this year as it needs to see goods disinflation followed by marked progress in the services sector, which is forecast to take longer.
Investors ignored him, piling further into bets the Fed will
cut rates this year while stocks rallied.
The S&P has risen more than 7% this year and is up more than
15% from its low in mid-October.
A premature easing in financial conditions is unwelcome for
central banks, as it lowers the cost of borrowing at a time when
rate setters are trying to keep it restrictive to dampen demand
across their economies and bring inflation to heel.
The IMF said history shows high inflation is often
persistent without "forceful and decisive" monetary policy
actions and noted too that while goods inflation has abated the
same progress is unlikely for the services sector without
significant cooling in the labor market.
"Crucially, central banks must avoid misreading sharp
declines in goods prices and easing policy before services
inflation and wages, which adjust more slowly, have also
moderated markedly," the authors wrote. "It is critical for
policymakers to remain resolute and focus on bringing inflation
back to target without delay."
(Reporting by Lindsay Dunsmuir; Editing by Chizu Nomiyama)
