by Marc Jones
LONDON (Reuters) – Central banks are on the verge of winning their fight against inflation, according to the latest quarterly report from the Bank for International Settlements (BIS), published on Monday.
The BIS, nicknamed the “central bank of central bankers”, believes that it is possible to demonstrate “cautious optimism”.
“Central banks took decisive action and thus prevented inflation from taking root,” Claudio Borio, head of the BIS’s monetary and economic department, told reporters. “At the same time, economic activity has been remarkably resilient and the financial system has performed well.”
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As its publications progress, the BIS has become more optimistic about the economic trajectory. At the end of 2023, the institution declared that the fight against inflation was progressing but was not over.
The BIS certainly warned, as usual, that risks remained, but Claudio Borio stressed that the gap between market expectations and central bank forecasts had narrowed considerably.
“The views of markets and central banks have converged, suggesting that for this time at least, central banks have better appreciated the risks,” said Claudio Borio.
The report also focuses on the risks of persistent inflation and the level of the neutral rate, or r*, after the COVI-19 pandemic and as aging populations and the return of protectionism reshape economies.
According to the report, inflationary pressures could become more entrenched as the weight of services increases in the economy, while the r* could be higher.
In the current context, the indicator is “so vague” that it will be “difficult to use it in the conduct of monetary policy”, added Hyun Song Shin, head of research at the BIS.
The institution was also concerned about the rise in technological stocks, in particular linked to artificial intelligence (AI).
Nvidia, which makes the chips to drive AI software, has seen its shares rise 66% this year, following a jump of nearly 240% in 2023. Meta has gained nearly 140% over the past 15 month.
“Whenever there are potential technological changes, enthusiasm takes over the markets and propels them to very high levels. Perhaps this is what is happening today,” said Claudio Borio.
However, many other markets around the world have seen strong gains this year, and investors are predicting “a very, very soft landing” for major economies, he added.
(Editor Marc Jones; French version Corentin Chappron, edited by)
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