BIS says central banks should raise interest rates further

He Bank for International Settlements (BIS) considers that the central banks they must raise their interest rates more to fight against the high inflation and that they should be left elevated for longer than the public and the investors are waiting.

The BIS said in its annual economic report, published on Sunday, that “the inflation It has started to come down from its highs for several decades almost everywhere, but the work of central banks is far from done.

The general director of the BIS, the Mexican Agustín Carstens, affirmed that “The key political challenge today is to fully control inflation, and the home stretch is often the most difficult.”

“The burden falls on many shoulders, but the risks of not acting promptly will be greater in the long run. Central banks are committed to staying the course to restore price stability and protect the purchasing power of the population.said.

Central banks must remain vigilant and raise interest rates further if necessary.

Inflation moderates but it is too soon to declare victory

Almost 95% of the world’s central banks raised their interest rates from the beginning of 2021 and until mid-2023, according to the BIS, whose headquarters are in the Swiss city of Basel and which today also held its 2023 annual meeting.

Historically, this share has rarely exceeded 50% and exceeded 80% during the oil crises of the 1970s.

The central banks of emerging and advanced economies have raised their rates at twice the historical rate.

But interest rates are still below inflation and therefore imply negative real rates.

Global economy slows, but avoids recession

Growth in the global economy slowed from 6.3% in 2021 to 3.4% in 2022, and has weakened further in the first quarter of 2023, but has so far avoided recession, according to the BIS.

The slowdown was more pronounced in the emerging economies, from 5.7 to 2.8%, while the emerging ones grew 4% in 2022, compared to 7.3% in 2021, despite the fact that China only grew 3% last year due to the lockdowns due to COVID-19 and the real estate crisis.

So far, the economy has held up well to rising money prices, supply chain problems have eased and energy prices have fallen, but the labor market is still overheated and rising prices in services they are hard to break.

So there is a risk of inflation taking hold as wage and price increases reinforce each other, according to the BIS.

In addition, despite the drop in headline inflation, core inflation, which discounts energy and food, is showing more stubbornness.

For this reason, adds the institution, “Interest rates need to stay higher for longer than the public and investors expect.”

Carstens stressed at a press conference that “prices in service sectors are still rising, labor markets are hot and unemployment is low.”

For this reason, the demands for salary increases can be very high and generate more inflation.

Demographic change in advanced economies is one reason the labor market is so hot, and immigration could provide a solution, but there are other issues related to recent events influencing labor markets.

Carstens observed that “Employment has not returned to pre-COVID-19 levels in service sectors that were highly distorted, such as tourism and airlines”.

“In Switzerland and Germany, many restaurants have not been able to reopen because they cannot find staff”Carstens said.

Wage claims can create more inflation

So far wage growth has not been exceptionally strong, but this can change quickly.

High inflation has severely eroded the purchasing power of households and therefore demands for wage increases have intensified.

In the euro area, negotiated wage growth is at its highest level since the introduction of the euro.

The BIS is concerned that companies have been able to raise their prices more easily than when inflation was low, now they are reluctant to accept that their profits are going to fall and they are going to pass the increase in their costs to the prices of their products or services .

Some rise in wages would not prevent inflation from returning to target, but only if companies accept a cut in profits.

For inflation to return to the 2% target, profits must fall by an average of 2.5% per year in 2023-2024, according to the BIS.

Source: EFE