OECD Economic Outlook, Interim Report March 2026

Policy requirements

Monetary policy should remain vigilant

30. Monetary policy rate developments are becoming increasingly varied across countries. Rates remain at or close to restrictive levels in the United States, the United Kingdom, Brazil, Mexico, South Africa and Türkiye, and have recently been raised in Australia, reflecting stronger than expected inflation pressures, and Japan. In contrast, policy rates have remained unchanged in the euro area, Canada and Korea with inflation close to target and policy rates close to neutral levels. Policy rates are also at moderate levels in many other emerging‑market economies, including India and Indonesia, with policy decisions remaining finely balanced to minimise risks of currency volatility and keep inflation expectations well anchored.

31. Central banks need to remain vigilant and attentive to shifts in the balance of risks around economic and financial developments to ensure that underlying inflation pressures are durably contained. The current supply-induced rise in global energy prices can be looked through provided inflation expectations remain well-anchored, but policy adjustment may be needed if there are signs of broader price pressures or weaker labour market conditions. Changes increase in global risk aversion due to the evolving conflict in the Middle East and associated currency movements may also bear on policy judgements in emerging-market economies. Careful calibration may be needed to balance the risks of persisting inflation against the downside risks of a significant growth moderation.

32. In the United States, policy rates are projected to remain unchanged through the remainder of 2026 and 2027, reflecting rising headline inflation in the near-term, core inflation projected to remain above target through 2027, and solid projected GDP growth (Figure 13). The policy rate is also expected to remain unchanged in the United Kingdom in 2026, before a decline in the first quarter of 2027 as inflation begins to moderate. In the euro area, a modest increase in policy rates is expected in the second quarter of this year to help ensure that inflation expectations remain well-anchored despite higher energy prices, with this remaining in place until inflation moves back to target in 2027. A policy rate rise is also projected in Australia in the second quarter of 2026, with rates then lowered gradually through 2027 as inflation wanes. Policy rates are projected to increase gradually in Japan as monetary policy accommodation continues to be withdrawn. Amongst the emerging‑market economies, India is projected to raise policy rates temporarily in the second quarter of 2026 to help offset stronger inflationary pressures. In contrast, policy rates are expected to decline in Brazil, Mexico, South Africa and Türkiye once inflation pressures moderate. In China, the policy stance is expected to remain accommodative.

Figure 13. Policy rate paths are diverging across countries

Note: Policy interest rates in the baseline projection. Panel A shows the midpoint of the federal funds target range for the United States and the deposit facility rate for the euro area.

Source: OECD Interim Economic Outlook 119 database.

Fiscal actions to cushion the impact of energy costs add to the pressures on the public finances

33. A number of governments have already announced emergency support measures for households and businesses to mitigate the renewed increase in energy costs, particularly in countries facing the risk of supply shortages. Any new discretionary measures should be well-targeted on households most in need and viable firms, preserve incentives to lower energy use, and have clear expiry mechanisms. The automatic budgetary stabilisers will also help to cushion the overall shock to the economy. Broad-based subsidies and transfers, tax reductions and price caps are easy to implement in a timely way, but will have higher fiscal costs and weaken incentives to reduce energy use. They are also more likely to require offsetting reductions in other spending areas if budgetary space is particularly tight.

34. Discretionary support was widespread in 2022‑23 to cushion real incomes and business costs following the energy price jump after the invasion of Ukraine, but was often poorly targeted with significant fiscal costs. Many governments also continued to provide sizeable help to energy users well after energy prices fell from their peaks, even though minimum wages and welfare benefits had been permanently increased by then to take account of past inflation. Two key lessons from the measures adopted in 2022‑23 were the difficulty in making a timely identification of the households and viable firms most in need of support, and designing policies that preserved incentives to save energy. For example, among G20 countries, Canada and Germany both had comparatively well-designed support measures. Even so, the measures adopted in Canada, while broadly successful in targeting support to vulnerable households, did not typically provide incentives to save energy and in Germany policy support preserved incentives to save energy, but was generally untargeted.

35. New fiscal actions to cushion the impact of higher energy prices will add to the budgetary challenges that most governments now face. With persistent budget deficits, elevated debt and rising debt interest costs, credible and well‑designed fiscal measures are needed to safeguard long-term debt sustainability and preserve the capacity to react to future shocks. In the median G20 economy, general government gross debt has risen by close to 40% of GDP since 2007, immediately prior to the global financial crisis. Other near-term spending demands, such as rising defence expenditure in many countries, are also now adding to the longer‑term fiscal pressures arriving from ageing populations and climate change. Many emerging and developing economies face additional spending challenges from the need to enhance their physical and digital infrastructure, address climate-related losses, and strengthen social safety nets.

36. The pace and mix of fiscal adjustments should vary across economies and depend on initial conditions, including the state of the public finances and the economy. They should also be anchored within credible medium‑term adjustment paths that focus on the need to strengthen sustainable economic growth while preserving adequate support for those in need. Containing and reallocating public spending, and improving public sector efficiency, are essential in many countries to limit the need for further tax increases, especially where spending is high relative to the size of the economy. Regular reviews of government programmes, enhanced use of digital technologies and better public procurement can all help in this respect. Higher tax receipts may also be needed where revenue is low as a share of the economy and there is room to lift revenues in a manner that limits distortions to work incentives and economic activity. Tax revenues, particularly in emerging and developing economies, can also be raised by broadening tax bases and improving tax compliance, as well as by raising rates.

37. Many countries have begun to raise defence spending significantly (Figure 14), including NATO countries committed to allocating 3.5% of GDP to core military spending by 2035. While initial spending surges can be debt‑financed in many countries, compensating reductions in non-defence spending or higher revenues will be needed eventually to ensure fiscal sustainability if defence spending remains elevated. Countries borrowing to finance re‑armament could experience a near-term boost to economic activity, especially if public debt is low and spare capacity is ample, but some crowding out of non-defence activity is likely over time as resource constraints become binding. The simultaneous expansion of defence spending in many countries might offer collective benefits, including to countries without domestic military production, but may also raise the prices of defence equipment and reduce the purchasing power of defence budgets. The current conflict in the Middle East might also raise near-term spending pressures. Effective procurement will be essential if governments are to contain the costs of rapid capability upgrades, encourage innovation and knowledge diffusion and foster growth in the defence industrial base. Greater efforts to harness competition, simplify unduly complex procedures and shorten acquisition cycles can all help in this respect. For the EU especially, a further priority is to promote efficient regional markets by harmonising procurement standards.

Figure 14. Military spending is increasing in many countries

Selected OECD member states

Note: Data for 2025 are estimates. The dotted line shows NATO Allies’ commitment to allocate 3.5% of GDP to core defence spending by 2035.

Source: Conigrave, B. and Y.-H Shin “Fiscal and macroeconomic impacts of defence spending” OECD Economics Department Working Paper No. 1861, OECD Publishing, Paris; NATO; Stockholm International Peace Research Institute; national budget and defence plans; and OECD calculations.

Resolving trade tensions would strengthen growth prospects

38. A lasting resolution to trade tensions would strengthen economic growth prospects. Governments need to work together, bilaterally and multilaterally, to find the best possible ways to make international trading arrangements fairer, and function better, in a way that preserves the economic benefits of open markets and rules-based global trade. Steps to lower tariffs and non-tariff barriers, deepen trade agreements or reduce barriers to trade in services could significantly improve living standards. Countries should avoid introducing export restrictions in response to global supply risks stemming from the conflict in the Middle East. Doing so could exacerbate global supply shortages and potentially raise prices further. Over the long term, countries need to make further efforts to reduce critical dependencies by developing alternative technologies to better ensure resilience and encourage diversification of suppliers and buyers.

Improving energy efficiency and reducing dependency on fossil fuel imports

39. Governments can do more to help lower the vulnerability of economies to geopolitical shocks. The recent events underscore the continuing exposure of economies to global energy disruptions, even if the intensity of fossil fuel use has declined steadily since the mid-1970s. In the short-term, temporarily switching to alternative fuel sources where possible, such as coal or electricity, would help to cushion the immediate shock, but may not be a permanent solution if it undermines longer-term decarbonisation targets. Encouraging other behavioural changes, including increased car sharing and public transport use, should also be explored. In the medium-term, further reducing reliance on foreign sources of fossil fuels, especially from conflict-prone regions, is a structural reform priority.

40. The primary demand-side priority for reducing reliance on foreign sources of energy is for governments to promote more efficient energy use. In addition to reducing the sensitivity of the domestic economy to fluctuations in global energy markets, such measures can improve business competitiveness and lower costs for households at a time of heightened affordability concerns in many economies. The International Energy Agency estimates that policy interventions by governments since 2000 have reduced household energy bills in advanced economies by 20%. This has coincided with steady energy efficiency improvements at the global level. Nonetheless, global energy efficiency improvements have slowed since the pandemic, to less than half the COP28 target of a 4% annual improvement by 2030. A stalling in progress in the industrial sector has been a key factor behind this slowdown.

41. A range of policy measures should be considered to promote greater energy efficiency in the household and industrial sectors, including those detailed recently by the International Energy Agency, While it will take some time for such measures to have their full impact, they are important elements in safeguarding economies against future energy crises. For industry, ongoing public investment in relevant research and development and regular upgrading of minimum energy performance standards for industrial equipment can help the private sector improve energy efficiency. Regulatory measures have historically led to the greatest efficiency improvements and may be more attractive than financial incentives given fiscal constraints in some economies. Energy efficiency in households can also be further boosted by regular regulatory upgrades, such as building, vehicle or appliance standards, along with information campaigns and financial incentives for lower income households to help offset the high upfront costs of necessary actions. If policies are introduced to shield households and firms from the ongoing energy price shock, they should be carefully designed to maintain incentives to improve energy efficiency, such as through using targeted cash transfers rather than energy bill subsidies.

42. On the supply side of energy markets, reducing fossil fuel imports in the domestic energy mix can help lower exposure to geopolitical risks. This is a particular priority for large net energy importers. Further efforts to promote low-cost domestic clean energy sources, such as renewable energy technologies, could both reduce fossil fuel imports and help governments achieve their carbon mitigation objectives. Both price-based and non-price-based policy approaches to encourage this transition should be considered, depending on national circumstances and preferences. Regulatory changes can be an important element, such as accelerated permitting procedures for renewable energy capacity. In addition, the transition will increase the prominence of electricity in energy systems and often require additional investment to expand the scale and durability of electricity grids. Enhancing energy-market integration, within countries and regions, could help to optimise the operation of national electricity networks. In all regions, the spillovers from future conflicts could also be cushioned by strong inventory management and emergency preparedness. For instance, global resilience to supply shocks could benefit from a coordinated build-up of inventories over the long-term, outside of periods of market stress. The work of the International Energy Agency in helping to co-ordinate oil reserves and collective responses to major disruptions in energy markets will remain vital.