LONDON, June 26 (Reuters) – The Bank for International Settlements (BIS), which acts as an umbrella organisation for the world’s central banks, has urged the raising of interest rates in a “rapid and decisive” manner in order to forestall the current upward trend in inflation from developing into an even more serious issue.
The Bank for International Settlements (BIS), which is based in Switzerland, recently held its annual meeting, during which the world’s most prominent central bankers gathered to discuss the challenges they are currently facing as well as one of the most turbulent starts to a year in the history of the world’s financial markets.
As a result of rising costs associated with energy and food production, inflation rates are currently at their highest levels in several regions in decades. But the typical solution of raising interest rates raises the spectre of a recession, and even of the dreaded “stagflation” of the 1970s style, which occurs when rising prices are coupled with low or negative economic growth. This is a situation in which prices are rising while economic growth is either stagnant or declining.
The general manager of the Bank for International Settlements (BIS), Agustin Carstens, was quoted as saying in the post-meeting annual report that was issued on Sunday that “the key for central banks is to act promptly and decisively before inflation gets entrenched.”
The previous president of Mexico’s central bank, Carstens, stated that the focus should be on taking action in the “quarters to come.” The Bank for International Settlements (BIS) believes that an economic “soft landing,” in which interest rates rise without causing recessions, is still conceivable, but acknowledges that it would be challenging.
Carstens noted that “a lot of it would rely on exactly on how persistent these (inflationary) shocks are,” adding that the reaction of financial markets will also be quite important in this regard.
“If this tightening causes large losses and generates massive asset corrections, and if that contaminates consumption, investment, and employment – of course, it is a more challenging scenario.”
As heavyweight central banks such as the Federal Reserve of the United States – and starting next month, the ECB – move away from record low interest rates and almost 15 years of back-to-back stimulus measures, world markets are already suffering one of the largest sell-offs in recent memory.
Since January, the global stock market (.MIWD00000PUS) has seen a decline of 20 percent, and some experts estimate that U.S. Treasury bonds, which serve as a benchmark for the world’s borrowing markets, may be seeing their worst first half of the year performance since 1788.
Carstens stated that the recent warnings issued by the BIS on inflated asset prices meant that the present downturn was “not necessarily a total surprise.” In addition, he stated that it was comforting to see that there had not been any “big market disruptions” as of yet.
A portion of the BIS research that was previously released the week before indicated that the recent explosions in the cryptocurrency markets were an indicator that the hazards of decentralised digital money that had been warned about for a long time were finally coming to fruition.
It is not anticipated that these failures would result in a systemic crisis in the same manner that subprime loans resulted in the global financial crisis. However, Carstens emphasised that losses would be significant and that the opacity of the crypto world fuelled uncertainty.
Returning to the larger picture of the economy, he said that the BIS did not at this time anticipate a period of widespread stagflation to take root. This was his return to the macroeconomic picture.
He also stated that even though many global central banks and the BIS itself had significantly underestimated how quickly global inflation has spiralled upward over the past six to 12 months, they were not about to lose their hard-earned credibility overnight. He said that this was due to the fact that many global central banks had underestimated how quickly inflation would spiral upward.
“You might make a case that the way certain acts and the replies of the central banks were timed was incorrect. This is something that you could argue. To a significant extent, though, I believe that the world’s central banks have reacted firmly and quite agilely to the current economic crisis “Carstens stated.
It is my impression that centralised banks would emerge victorious in the end, which would be beneficial to the reputation of these institutions.