Soft landing or not for the economy, the priority for central banks must be to not let inflation take root as “the risk of stagflation hovers over the global economy”, the Bank warned yesterday. International Settlements (BIS), considered the central bank of central banks. In its annual report, this institution based in Basel, Switzerland, believes that central banks will have to “act decisively” and “without delay” to ensure the return to low and stable inflation, while limiting the impact on the growth. “Of course, it would be better to have a soft landing”, weighed Agustín Carstens, its managing director, and former governor of the central bank of Mexico, during a press conference on the occasion of the publication of this report. “But even if that 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 deteriorating. install “in a regime of high inflation”.
After the shock of the pandemic, central banks initially viewed the return of inflation as transitory when the economy picked up again. But the rise in prices has accelerated significantly 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 largest rate hike since 1994. On Wednesday, its chairman, Jerome Powell, acknowledged that a recession was “Certainly a possibility”, even if this is “not at all the desired effect”, he specified, triggering strong upheavals on the financial markets.
Differences from 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 points of vulnerability, including the currently 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 spiral into an attempt to offset rising prices, in turn fueling inflation. “If inflation takes hold, the costs of getting it back under control will be higher,” Carstens warned. “The longer-term benefits of preserving stability for households and businesses outweigh any short-term costs,” he said.
Soft landing or not for the economy, the priority for central banks must be to not let inflation take root as “the risk of stagflation hovers over the global economy”, the Bank warned yesterday. International Settlements (BIS), considered the central bank of central banks. In its annual report, this…