The world central bank’s apex body, the Bank for International Settlements (BIS), has called for a “swift and decisive” hike in interest rates to prevent soaring inflation from turning into something drastic. even more problematic.
The Swiss-based BIS held its annual meeting in recent days, where top central bankers gathered to discuss their current struggles and one of the most turbulent starts to the year in history. global financial markets.
Soaring energy and food prices mean that inflation in many places is now the highest in decades. But the usual remedy of raising interest rates raises the specter of recession, and even the dreaded 1970s-style “stagflation,” where rising prices are accompanied by weak or negative economic growth. .
“The key for central banks is to act quickly and decisively before inflation takes hold,” BIS chief executive Agustín Carstens said in the annual post-meeting report. organization.
Carstens, Mexico’s former central bank chief, said the focus was on action in the “quarters ahead.” The BIS thinks a soft landing for the economy – where rates rise without triggering a recession – is still possible, but accepts that this is a difficult situation.
“Much of it will depend on whether these (inflationary) shocks are permanent,” Carstens said, adding that the response of financial markets will also be crucial.
“If this tightening generates massive losses, generates massive asset corrections, and it contaminates consumption, investment and employment – of course, that is a more difficult scenario.”
Global markets are already suffering one of the biggest selloffs in recent memory as heavyweight central banks like the US Federal Reserve – and from next month the ECB – pull away from record rates and nearly 15 years of measures consecutive raises. .
Global equities are down 20% since January and some analysts are calculating that US Treasuries, the benchmark for global bond markets, could see their biggest first-half loss since 1788.
Carstens said the BIS’ own recent warnings about frothy asset prices meant the current correction was “not necessarily a complete surprise”. The fact that there have been no “major market disruptions” so far is also reassuring, he added.
Part of the BIS report published already last week stated that the recent implosions in the cryptocurrency markets indicated that the long-warned dangers of decentralized digital currency were now materializing.
These meltdowns are not expected to cause a systemic crisis in the same way bad debts triggered the global financial crash. But Carstens stressed that the losses would be significant and that the opaque nature of the crypto universe fueled uncertainty.
Returning to the macroeconomic situation, he added that the BIS does not currently expect a period of widespread stagflation to set in.
He also said that although many global central banks and the BIS itself had significantly underestimated the rate at which global inflation had soared over the past six to 12 months, they were not sure. the point of losing hard-earned credibility overnight.
“Yeah, you can argue a bit here about mistiming of some actions and central bank responses. But overall, I think central banks reacted very forcefully and in a very nimble way,” he said. Carsten.
“My feeling is that the central banks will prevail in the end, and that would be good for their credibility.”