06/30/2024 – 10:11
The Bank for International Settlements (BIS) warns of a still “challenging” scenario in the global economy, but rules out interest rate hikes in most countries. Inflation is expected to continue falling, with some inertia in the last phase of the fight against prices, and therefore central banks must be alert to changes on the horizon and the need to raise rates again, which should only occur in extreme cases, according to the entity, which published its annual report today.
“The main message we have is that we probably shouldn’t have any interest rate increases at this stage in most countries,” BIS general manager Agustín Carstens told a news conference to comment on the document.
The base scenario of the entity, based in Basel, Switzerland, is that the global economy will make a soft landing and that the fall in inflation will be “lasting”, with indices returning to the targets established by central banks. The BIS outlines two other plausible alternative scenarios. In the first, inflation resurfaces, with resistance in prices or possible shocks. In the second, it continues to fall, but global economic growth deteriorates sharply, potentially leading to a forced landing.
“Most of the most likely scenarios are that we will still see reductions in interest rates,” said Carstens. He stated, however, that central banks have to be “very attentive” and “careful” with the process of reducing inflation since some factors can delay this convergence as the last mile in the fight against prices generally has some “inertia”.
“If circumstances or prospects change, central banks must be prepared to raise rates in extreme scenarios,” warned the general manager of the BIS, in a conversation with journalists.
According to him, the BIS is not making a call to the monetary authorities to restart a new cycle of increasing interest rates. The warning is for central banks to be aware of the fact that reducing inflation adequately takes time, he explained. “It’s too early to declare victory,” Carstens said.
The BIS states in its annual report that there are several risk factors for inflation, the main one being the adjustment of prices in the services sector in relation to the goods sector. Another is the behavior of wages in relation to the price level of the goods and services sectors. Both are interconnected because the services segment is labor-intensive, according to the entity.
The father of central banks also reinforces the warning regarding fiscal policy, which he considers an “absolute priority”. In his view, this is one of the “problems” that could hinder the last stage of the fight against inflation. And, according to Carstens, fiscal sustainability is a “concern” in general, and is not a question of just one or two countries. “This will increase even more as interest rates remain high”, he warned.
The BIS general manager also said that this is an important issue from the point of view of macro-financial stability. According to him, a very relaxed fiscal policy could go against monetary policy and impact the ongoing disinflation process. Furthermore, to ensure the current functioning of markets, it would be “desirable” for governments to consolidate their public finances, working to reduce their debts as a proportion of Gross Domestic Product (GDP), he suggested.
“In this challenging environment, policies will have to complete the task of guiding the economy back to price stability and laying the foundations for lasting growth,” concludes the father of central banks, in its annual report.
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