The Bank for International Settlements (BIS), an international financial institution owned by member central banks, has cautioned that despite inflation subsiding in many regions, central banks still have significant work ahead of them.
In a statement, the BIS noted, “Despite the most intensive monetary policy tightening in recent memory, the final stage of achieving price stability will be the most challenging.”
The institution highlighted that progress in reducing price hikes has been attributed to supply chain improvements and declining commodity prices. However, the labor market remains tight, and reining in services inflation has proven difficult.
“There is a material risk that an inflation psychology will take hold, where wage and price increases start to reinforce each other. Interest rates may need to stay higher for longer than the public and investors expect,” it said.
Extended Hikes: The BIS report coincides with two significant developments in central banking. The Bank of England surprised the market by raising rates by 50 basis points to address persistent and higher-than-expected inflation. Meanwhile, Federal Reserve Chair Jerome Powell has indicated the possibility of another 50 basis points rate hike this year.
To address these challenges, the BIS proposed that governments tighten their budgets, focusing support on the most vulnerable while implementing long-term spending consolidation. This approach would help control inflation, mitigate financial stability risks, and reduce the need for prolonged higher interest rates, according to the institution.
Agustín Carstens, the general manager of the BIS, emphasized that fully taming inflation remains the key policy challenge. He acknowledged that the last mile of the journey is typically the most difficult but stressed the importance of acting promptly.
Carstens said, “The burden is falling on many shoulders, but the risks from not acting promptly will be greater in the long term. Central banks are committed to staying the course to restore price stability and protect people’s purchasing power.”
© 2023 Zenger News.com. Zenger News does not provide investment advice. All rights reserved.
Produced in association with Benzinga
Edited by Arnab Nandy
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