An Urgent Call for Monetary Policy Revisions
The Bank for International Settlements (BIS), the international body overseeing central banks, made an urgent plea on Sunday for more hikes in interest rates. It warns of the world economy sitting on the precipice of a crucial stage, as nations grapple with controlling inflation. Over the past 18 months, despite an unyielding ascent in rates, many leading economies are struggling with persistently high inflation. This surge in borrowing costs has ignited the most significant banking collapses since the financial crisis, 15 years ago.
Addressing Global Economy's Stern Challenges
BIS general manager, Agustin Carstens, stated in the organization's annual report that the global economy is now at a defining juncture. "The time to obsessively pursue short-term growth is past. Monetary policy must now restore price stability. Fiscal policy must consolidate," he asserted. Claudio Borio, the head of BIS's monetary and economics unit, warned of a growing "inflationary psychology," yet noted the large-than-anticipated rate hikes in the UK and Norway demonstrate central banks' commitment to tackling the issue.
Unique Challenges in the Post-WWII Era
In a departure from post-World War II trends, we're witnessing a global surge in inflation alongside widespread financial vulnerabilities. The report from the BIS states that as inflation continues to be high, the required policy tightening will have to be stronger and more prolonged. It further warns of "material" risks of more problems arising in the banking sector.
Mid-1990s Level Interest Rates Pose Historic Debt Burden
Borio points out that if interest rates reach mid-1990s levels, the overall debt service burden for top economies could become the highest in history. He remains confident, however, that central banks can get inflation under control, but questions the cost of such an endeavor.
Banking Crises Amidst Rate Hikes
Recent months have been turbulent for central banks, as they grapple with a wave of banking crises. This includes the failure of several U.S. regional banks and an emergency rescue of Credit Suisse. Historical data shows that about 15% of rate hike cycles result in severe stress in the banking system, a frequency that increases with rising interest rates, surging inflation, or a sharp rise in house prices.
High Debt Levels and Aging Populations Challenge Economies
The BIS estimates that over the next 20 years, the cost of supporting aging populations will grow by approximately 4-5% of GDP in advanced and emerging market economies, respectively. Without government austerity measures, this could push debt above 200% and 150% of GDP by 2050 in these economies and could increase if economic growth rates decrease.
Shaping the Future Financial System: Digital Currencies and Tokenised Assets
A portion of the BIS report unveiled a game-changing blueprint for an evolved financial system, where central bank digital currencies and tokenized banking assets expedite and refine transactions and global trade.
Correcting Unrealistic Expectations: The Need for Policymakers to Act
Emphasizing the urgency for action, the former head of Mexico's central bank, Carstens, said that unrealistic expectations about persistent monetary and fiscal support, borne out of the Great Financial Crisis and COVID-19 pandemic, need to be addressed. The BIS suggests that an economic "soft landing" is still achievable, albeit a challenging task.
Global Interest Rates: Hikes Versus Cuts
Analysts from Bank of America calculated an astounding 470 global interest rate rises over the past two years, compared with 1,202 cuts since the financial crash. Despite major hikes from the U.S. Federal Reserve, European Central Bank, and developing economies, the question remains if more will be needed.
Last Mile Challenges for Central Banks
With signs of companies leveraging the situation to boost profits and workers demanding higher wages to protect living standards, the path to reeling inflation back to safe levels is set to be more challenging. "The easy gains have now been reaped and the last mile is going to be more difficult," Borio said, suggesting that more surprises may lie ahead.