The Bank for International Settlements (BPI) believes that central banks must raise interest rates more to fight high inflation and that they must leave them high for longer than citizens and investors expect. The bank of central banks says in its annual economic report, published yesterday, that “inflation has started to come down from multi-decade highs almost everywhere, but the work of central banks is far from done”.
The director general of the BPI, the Mexican Agustín Carstens, stated during the annual assembly held yesterday in Basel, headquarters of the entity, that “the key political challenge today is to completely control inflation, and the final stretch is usually the more difficult”, reports Europa Press. In his opinion, “the burden falls on many shoulders, but the risks of not acting promptly will be greater in the long term. Central banks are committed to maintaining the course to restore price stability and protect the purchasing power of the population”.
Almost 95% of the world’s central banks have raised interest rates from the beginning of 2021 until mid-2023, according to the BPI. Historically, the percentage rarely exceeds 50%, although it exceeded 80% during the oil crisis of the 1970s.
Rate hikes by central banks in emerging and advanced economies have been at twice the historical rate. But interest rates remain below inflation and therefore imply negative real rates.
Global economic growth slowed from 6.3% in 2021 to 3.4% in 2022, and weakened further in the first quarter of 2023, but has so far avoided recession, according to the BPI.
So far, the economy has weathered the money price hikes well, supply chain issues have eased and energy prices have dropped, but the labor market is still overheated and price hikes in services are difficult to bend, according to the BPI.
So there is a risk that inflation will take root when increases in wages and prices reinforce each other, this body points out.
Carstens emphasized that “prices in the service sectors are still rising, labor markets are hot and unemployment is low”. The director general of the BPI also added that “in Switzerland and Germany, many restaurants have not been able to reopen because they cannot find staff”.
