Inflation has been lowered all over the world in recent months, but as the planet’s major central banks have warned, the most difficult phase is still ahead. “The main political challenge today remains to fully control inflation and last mile is usually the hardest,” he says. Augustine CarstensCEO Bank for International Settlements (BIS for its English abbreviation), on the occasion of the presentation of the organization’s annual report basel.
The Bank for International Settlements warns that “interest rates may need to remain high for longer than the public and investors expect”
“It may be harder to get the last mile,” says the report from their agency. 73 central banks from around the world. The thing is, the spiral between Fees and earnings (runoff effects) may trigger higher inflation for a longer period of time. And BIS “Once the relationship is established psychology of inflationIt’s hard to evacuate him.”
“It is clear that the fiscal and monetary policy support in the face of Covid is very large, very broad-based and long-lasting”
“Critical and Dangerous Crossroads”
With more persistent inflation, “possible Interest rates need to stay high for longer “of the public and investors’ expectations,” pushing BIS forward. And this is what puts the world economy at a crossroads. “critical and dangerous” With the rapid, intense and permanent increase in interest rates, “some historically high private and public debt levels” Worldwide.
A cocktail of inflation, high interest rates and high debt caused Payments Bank to sound alarm and part of this process. global financial crisis and tied up the most indebted governments.
According to this car, This scenario forces central banks to stick with their aim of containing inflation: “The burden is on many shoulders, but the risks of not acting quickly will be greater in the long run. Central banks are determined to stay on course to restore price stability and protect people’s purchasing power.” From the perspective of the Bank for International Settlements, fiscal policy Yet precautionary regulation of the financial sector Implement checks and balances to prevent central bank policies from derailing the economy. “The longer inflation persists, the greater the chance of it taking root and the higher the cost of suppressing it,” he warns. In a hypothetical scenario persistent inflation And high rates Interest rates, rising debt burden and falling asset prices by 2027 2 point loss in GDP According to BIS simulations, it is one of the leading economies in the world.
The prick of the “growth illusion”
Looking back, the international organization diagnoses that “current tensions are the culmination of decades of reliance on monetary and fiscal policy as de facto engines of growth.” That’s what the BIS says”illusion of growth“: “Due to exceptionally low interest rates, the debt burden has never been so light. The blindingly low rates spurred further expansion of public and private debt.”
In this context, where interest rates are at historically low levels, the spending policy that all governments faced first with the Kovid crisis and then with inflation was deemed appropriate. “While the outbreak of the Covid crisis is understandable, in retrospect the support of fiscal and monetary policy It was very large, very broad-based, and long-lived.”.
Looking ahead, BIS “don’t fall into the same trapIt brought with it the “illusion of growth”: “The unintended consequence was to rely on a debt-based growth model that made the system more. fragile cannot achieve solid and sustainable growth”.
also known as ‘central bank of central banks’ extremely concerned about the stability of the financial system and financial crisis Much more relevant dimensions than recorded last March with the decline of various regional banks in the US and Credit Suisse in Switzerland. Exactly, the head of the Bank of Spain, Pablo Hernandez de CosHe is the Chairman of the Basel Committee on Banking Supervision at BIS.
Historical experience shows that “this is quite common. bank tension after tightening monetary policy”; often, Three years later The first increase in interest rates points to the annual report of the BIS (on this occasion, rate increases began in the first half of 2022 in the USA).
Hidden risk of financial crisis
Possibility of financial crisis after tightening of interest rates, initial debt levels when it’s high, real estate prices when it is high or when there is an increase inflation more strong. “The current division meets all requirements,” says the organization, which was founded in 1930.
The acid test will come when the rise in rates begins to translate into credit default. From the outset, the BIS predicts that “loan losses will be in line with historical averages”, but warns that in a scenario with higher rates and a longer duration, the losses will be “of similar magnitude to those of loan losses.” Great Financial Crisis“In any event, it is recognized that greater capitalization of the banking system will help mitigate the impact of these losses.
and facing possible deposit leaks Accompanying the most vulnerable institutions in times of banking stress, the BIS advises that those who turn to much more ambitious deposit guarantee funds should not listen to proposals that “will weaken banks too much”. market discipline” and will increase the risks of bankruptcy.