Central banks can raise interest rates – El Financiero

Agustín Carstens, director general of the Bank for International Settlements (BIS), said central banks have no choice but to continue raising interest rates to mitigate the global inflation risks they are currently exposed to.

Carstens – who was also governor of the Bank of Mexico (Banxico) between 2010 and 2017 – explained that the world is going through record levels of inflation caused by ongoing supply chain shocks and the current geopolitical context, for which central banks must act quickly. Crucially to prevent inflation from getting under control.

“Central banks must make clear and good the ultimate goal: get inflation quickly to the target,” he said in a presentation of the Bank for International Settlements’ annual economic report 2022, warning that the longer it takes economies to control inflation, the higher the cost. will have to endure.

In general, controlling inflation was costly. The higher and more stable the initial rate of inflation, the more likely the cost will go up…Continuous inflation expectations become an integral part of labor contracts and wage negotiations, requiring further decline in aggregate demand and thus higher unemployment, to curb persistent inflation. He added that the task of monetary policy becomes more difficult.

He explained that this situation is exacerbated in emerging markets, where they will face more difficult financial conditions.

Carstens considered that despite moving earlier and being in a better position than in previous periods of tightening, some emerging markets have no choice but to raise interest rates higher, also because their real rates remain negative.

He noted that at the current stage, one of the risks for advanced economies is that large declines in asset prices could lead to severe recession and financial stress.

He considered that a soft economic downturn with high interest rates and without recession rings is still possible, but much will depend on the durability of the current inflationary shocks.

When asked if the United States and the European Union might face a recession next year, Carstens admitted that the possibility could not be ruled out. “We are not comfortable with these expectations, but we cannot eliminate the possibilities,” he said.

On the other hand, Claudio Borio, Head of the Department of Economic and Monetary Analysis at the Bank for International Settlements, highlighted that many advanced economies have struggled over many years to raise inflation towards the target, however, the current context is now different, and now they have to struggle to Reducing the rise in input prices.

“It’s just a display of how quickly the world can change: After many years of trying to get prices up to the target, they are now facing the familiar and painful challenge of lowering them,” the official said.

Cryptoactives, additional risk

Carstens noted that another major challenge facing central banks is the massive emergence of crypto assets and stablecoins in recent months, as well as their evolution towards decentralized finance.

He highlighted the collapse of many crypto activities — including bitcoin, which lost more than 50 percent of its value in the year — a clear lesson for the future of the monetary system, as the currencies backed by central banks themselves.

Currently several central bodies, including Banxico, are in the process of issuing their own backed digital currencies.