LONDON: The world’s umbrella central bank, the Bank for International Settlements (BIS), has urged major economies to continue with vigorous rate hikes, despite the growing threat of recessions and currency market volatility.
The Switzerland-based BIS quarterly report acknowledged that both recession and debt risk were on the rise, but said curbing rising global inflation remained paramount.
“It is important to act in a timely and vigorous manner,” said the head of the monetary and economic division of the BIS, Claudio Borio. “Front-loading (of fare increases) tends to reduce the chances of a hard landing.”
Another super-large rate hike from the US Federal Reserve is expected this week, whose sharp moves this year, alongside Russia’s invasion of Ukraine, have already sparked widespread turbulence in financial markets.
When asked if there was a point where central banks could go too far, Borio said this was the “1 billion, 3 billion, how many billion you want to say, dollar question.”
What makes it particularly complex, he added, is that this is the first time since at least World War II that policymakers are attempting to tackle rising inflation at a time when debt crises are already erupting and serious concerns are about overpriced spending. real estate markets.
In addition, growth forecasts were further revised downwards, while inflation forecasts continued to rise.
“We know the path is quite narrow,” said Borio. “Obviously if there was a recession risk before, the risk has increased.”
Graphics: Euro falls as war in Ukraine fuels gas crisis: https://fingfx.thomsonreuters.com/gfx/mkt/lgpdwdlzjvo/Pasted%20image%201662469552346.png
The rapid rise in inflation, interest rates and energy prices this year has led to one of the biggest sell-offs ever in financial markets.
Global stock indices have fallen more than 16 percent since January. The yen, the euro and most currencies of the emerging economies have hammered, and yields on US Treasuries, the benchmark of global credit markets, have risen to their highest levels since 2011.
A special section of the BIS report also pointed to the potential for further problems in the future.
It warned that replacing Russian oil would be difficult given the limited spare capacity of other major producers and moderate investment in new projects.
Graphics: Russian oil hard to replace: https://fingfx.thomsonreuters.com/gfx/mkt/zdvxomedopx/Pasted%20image%201663548217165.png
That could lead to continued price increases for oil-related goods, while the jump in natural gas prices could have a large and long-lasting effect on electricity prices and could create major headwinds for industrial production.
Outside of the United States, the dollar’s surge is adding to inflation problems and also increasing pressure on less developed countries that have borrowed heavily in dollars but are now struggling to repay the money as their own currencies collapse.
“This could put even more pressure on monetary policy to tighten to avoid a major depreciation and could also, as an additional tool, lead to foreign exchange intervention, as it has already done in a number of countries,” he said. borio.
Charts: World Currencies in 2022: https://fingfx.thomsonreuters.com/gfx/mkt/znpnewgbbvl/Pasted%20image%201663548490760.png