The Bank for International Settlements urges regulators to get ready for a changing environment
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A new era of higher inflation and interest rates is impending as traditional ties between Western countries on one side, and Russia and China on the other, are deteriorating, while the impact of the coronavirus pandemic is driving globalization into reverse, said the head of the Bank for International Settlements, Agustín Carstens.
“A key message is that we may be on the cusp of a new inflationary era,” the general manager of the BIS central bank umbrella group said on Tuesday.
“We need to be open to the possibility that the inflationary environment is changing fundamentally,” Carstens added.
And “if my thesis is correct, central banks will need to adjust”.
The warning comes amid spiking prices for energy and food that are pushing year-on-year inflation in over half of developed economies soaring above 5%, while half of the developing world is expected to face inflation of over 7%. Meanwhile, major economies were forced to raise interest rates from all-time lows.
The supply chain crisis that was sparked by the Covid pandemic and trade wars has been inevitably worsened by the latest conflict between Russia and Ukraine, sending living costs around the world skyrocketing.
The immediate implication would be that policymakers would have to quickly shift their “mindsets” to how to stop inflation running out of control, Carstens said, stressing that the expectations of consumers, businesses and financial markets for how high inflation will go are becoming “unmoored.”
“Most likely, this will require real interest rates to rise above neutral levels for a time in order to moderate demand,” the head of the BIS said, acknowledging that it could make them unpopular.
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