The international financial organization that coordinates central banks around the world, the Bank for International Settlements (BIS, for its acronym in English) called for acting “quickly and decisively” before inflation becomes a difficult problem to control .
The BIS based in Basel, Switzerland and headed by Mexican Agustín Carstens, held its annual meeting on Sunday, June 26, where it released its flagship economic report.
During the meeting the bank warned about the risk of entering into a new era of high inflation by the combination of persistent disruptions from the pandemic, the war in Ukraine, rising commodity prices, and financial vulnerabilities.
Given this scenario, “the key for central banks is act quickly and decisively before inflation takes hold,” Carstens said, as part of the agency’s annual report published this Sunday.
“If you do, the costs to bring it back under control will be higher. The long-term benefits of preserving stability for households and businesses outweigh any short-term costs,” she added.
Carstens calls for more actions from central banks
“The risk of stagflation hangs over the global economy, as the threat of a new era of inflation coincides with a weaker growth outlook and elevated financial vulnerabilities”, warned the bank in the report.
Legislators around the world have already increased interest rates to combat record inflation coming at the same time as the fallout from Russia’s invasion of Ukraine and lockdowns in China weighing on global growth.
Some 70 central banks have increased borrowing costs and half of them, including the US Federal Reserve, have resorted to massive hikes of 75 basis points or more in one go.
“We have seen important developments in inflation, not just flare-ups but a potential change in inflation dynamics.” In general, more needs to be done.
“Policymakers need to push ahead with reforms to support long-term growth and lay the groundwork for more normal fiscal and monetary policy environments,” he said.
“Soft landing”: challenge for central banks
There is a narrow path for the world’s central banks to stem the rise in inflation without pushing their economies into recession, according to the head of the Bank for International Settlements.
“There is a possibility that it can be achieved without a major impact, with a impact on GDP but without reaching a recession”, assured Carstens to Bloomberg TV this Monday in an interview. “But this is a narrow path and we cannot rule out the possibility of a hard landing.”
Last week, Federal Reserve Chairman Jerome Powell acknowledged that sharp interest rate hikes could push the US economy into recession, calling a soft landing “very difficult.”
Carstens said central banks “are at the very beginning of the effort to reverse inflation,” calling efforts to date “so far so good” but saying there are still “some ways forward.”
“The good thing is that monetary policy has begun to act forcefully,” he said. Looking to the future, the most important thing is “that the central bank actions persist and act forcefully in a flexible manner.”
With information from Bryce Baschuk, Dani Burger, Matthew Miller, and Alessandra Migliaccio of Bloomberg.