The Bank for International Settlements (BIS), the world’s central bank umbrella organisation, has urged for interest rates to be hiked “soon and firmly” to avoid inflation from worsening.
The Swiss-based BIS recently conducted its annual meeting, where senior central bankers convened to discuss their present challenges and one of the most tumultuous beginnings to a year in global financial markets ever.
Inflation in many locations is currently at its highest in decades, thanks to rising energy and food prices. However, hiking interest rates raises the spectre of recession, and even the dreaded “stagflation” of the 1970s, in which rising prices are accompanied by low or negative economic growth.
“The key for central banks is to act quickly and decisively before inflation becomes entrenched,” Agustín Carstens, BIS general manager, said as part of the body’s post-meeting annual report published on Sunday.
Carstens, a former president of Mexico’s central bank, stated that the emphasis was on acting in “coming quarters.” The BIS believes that an economic soft landing – in which interest rates rise without sparking recessions – is still conceivable, but acknowledges that it is a tough scenario.
“A lot of it will depend on precisely on how permanent these (inflationary) shocks are,” Carstens said, adding that the response of financial markets would also be crucial.
“If this tightening generates massive losses, generates massive asset corrections, and that contaminates consumption, investment and employment – of course, that is a more difficult scenario.”
World markets are already experiencing one of the most significant sell-offs in recent memory, as heavyweight central banks such as the United States Federal Reserve – and, beginning next month, the European Central Bank – shift away from record low interest rates and nearly 15 years of back-to-back stimulus measures.
Global stocks are down 20 per cent since January, and some analysts believe that US Treasury bonds, the benchmark for global borrowing markets, may have had their worst first half-year loss since 1788.
According to Carstens, the current downturn was “not necessarily a complete surprise” given the BIS’s prior warnings about inflated asset prices. He also found it encouraging that there had been no “significant market disruptions” thus far.
Part of the BIS paper, which was released last week, stated that recent bitcoin market explosions were evidence of long-foreseen dangers of decentralised digital money.
These failures are not expected to spark a systemic crisis in the same way that bad loans precipitated the global financial crisis. However, Carstens emphasised that losses would be substantial, and that the opaque structure of the crypto world exacerbated uncertainty.
Returning to the macroeconomic picture, he stated that the BIS does not currently anticipate widespread stagflation.
He also stated that, while many global central banks, including the BIS, had substantially miscalculated how quickly global inflation had risen in the recent six to twelve months, they were not about to lose their hard-earned reputation overnight.
“Yes, you can argue a little bit here about an error of timing of certain actions and the responses of the central banks. But by and large, I think that the central banks have responded forcefully in a very agile fashion,” Carstens said.
“My sense is that central banks will prevail at the end of the day, and that would be good for their credibility.”
(Adapted from EconomicTimes.com)