The smaller increase is an acknowledgment of the narrow path between containing inflation and inflicting significant economic damage. Governor Philip Lowe noted in particular:

One source of uncertainty is the outlook for the global economy, which has deteriorated recently.

Chart 1: Forecasts for growth have been revised down by the OECD

Source: OECD

At the heart of the sobering forecasts are two factors. First, price increases have been broader, and more persistent than most policymakers expected. Second, central banks have responded with aggressive increases in interest rates aimed at slowing demand and flattening inflation.

The concurrent nature of interest rate increases across the global economy is evident in the Global Monetary Policy Tracker published by the Council on Foreign Relations. The tracker is at its highest reading in more than a decade indicating a broad tightening of monetary policy. This concurrent tightening is delivering a demand-side shock that is slowing global economic growth.

Chart 2: A concurrent increase in interest rates risks a demand-side shock

Source: Council on Foreign Relations, Global Monetary Policy Tracker

The OECD’s downward revisions to projections begs the question, are we heading towards a global economic recession? While the revised projections are concerning, they are not yet that dire, with 2.2% global GDP growth still predicted for 2023. But the path for a soft landing for the global economy is looking increasingly fraught.

For a more detailed discussion on the global outlook and the Australian economy stay tuned for our latest edition of Business Outlook.