Central banks must not let inflation take root, warns BIS

Soft landing or not of the economy, the priority of central banks must be not to let inflation take root while “the risk of stagflation hovers over the global economy”, warned Sunday the bank of the international regulations (BIS)

In its annual report, this institution based in Basel, Switzerland, believes that central banks will have to act decisively and without delay to ensure a return to low and stable inflation, while limiting the impact on growth.

Surely, it would be better to have a soft landing, said Agustn Carstens, its managing director and former governor of Mexico’s central bank, at a press conference on the occasion of the publication of this report.

But even if this is not the case, the priority must be to fight inflation, added the director of this institution considered as the central bank of central banks, in order to prevent the world economy from settling in a high inflation rate.

After the shock of the pandemic, central banks initially viewed the return of inflation as transitory when the economy picked up. But the rise in prices has sharply accelerated since the invasion of Ukraine, leading them to tighten their key rates abruptly.

While the European Central Bank plans to raise rates in July and then September, the US Federal Reserve last week carried out its biggest rate hike since 1994.

On Wednesday, its chairman, Jerome Powell, acknowledged that a recession was certainly a possibility, even if it is not at all the desired effect, he said, triggering strong jolts in financial markets .

– Differences with the 1970s –

In its annual report, the BIS, which regularly publishes studies on major monetary policy issues, looked at the stagflation of the 1970s, when the oil shocks of 1973 and 1979 caused inflation to jump.

In 1973, oil prices had more than doubled in the space of a month, much more than today. Oil then occupied a much more important place in the economy, she analyzed.

Moreover, inflation was already on the rise before the oil shock, while the global economy is now emerging from a long phase of low inflation.

But the BRI has also highlighted other vulnerabilities, including the current high level of both private and public debt. And with the war in Ukraine, the inflation this time is not only for oil, but also for other sources of energy, agricultural raw materials, fertilizers and metals.

The most urgent challenge for central banks is therefore to bring inflation down to low levels, according to the BIS. Situations of high inflation tend to be self-reinforcing, warns the BIS, especially when wages begin to spiral in an attempt to offset rising prices, which in turn fuels inflation.

If inflation takes hold, the costs of getting it back under control will be higher, Mr. Carstens warned. According to him, the longer-term benefits of maintaining stability for households and businesses outweigh any short-term costs.

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