Economy

Bank for International Settlements supports ‘strong’ interest rate increases despite higher recession risks

Bank for International Settlements supports ‘strong’ interest rate increases despite higher recession risks

Written by Mark Jones

LONDON (Reuters) – The Bank for International Settlements, the global central bank’s overarching body, urged major economies to press ahead with aggressive rate hikes despite the growing threat of recession and currency market volatility.

The Swiss-based Bank for International Settlements (BIS) quarterly report acknowledged that recession and debt risks are on the rise, but said bringing down soaring global inflation remains paramount.

“It is important to act in a timely and robust manner,” said Claudio Borio, head of monetary and economics at the Bank for International Settlements. “Front loading (for higher prices) tends to reduce the likelihood of a hard landing.”

This week is expected to see another significant increase in interest rates from the US Federal Reserve, whose sharp moves this year, along with the Russian invasion of Ukraine, have caused widespread turmoil in financial markets.

Asked if there was a point where central banks might go too far, Borio said “1 billion, 3 billion, whatever billions you want to say, dollar question.”

What makes it particularly complicated, he added, is that this is the first time since at least World War II that policymakers have tried to tackle soaring inflation at a time when debt crises are already erupting and when there are serious concerns about overvalued property markets.

Moreover, growth forecasts continued to decline while inflation expectations continued to rise.

“We know the road is very narrow,” Borio said. “Obviously if there was a risk of a recession before, the risk has increased.”

Charts: Euro falls as Ukraine war ignites gas crisis: https://fingfx.thomsonreuters.com/gfx/mkt/lgpdwdlzjvo/Pasted%20image%201662469552346.png

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The rapid rise in inflation, interest rates and energy prices this year has led to one of the biggest selloffs ever in the financial markets.

Global stock indices are down more than 16% since January. The yen, the euro and most emerging economies’ currencies were hit hard, and US Treasury yields, the benchmark for global borrowing markets, rose to their highest levels since 2011.

A special section of the BIS report also indicated the possibility of more problems in the future.

He warned that replacing Russian oil would be difficult given the limited spare capacity of other major producers and low investment in new projects.

Graphics: Russian oil is hard to replace: https://fingfx.thomsonreuters.com/gfx/mkt/zdvxomedopx/Pasted%20image%201663548217165.png

This could cause oil-related commodity prices to continue to rise, while a jump in prices could have a significant and long-lasting impact on electricity prices and provide significant headwinds for industrial production.

Outside the US, the rising dollar is adding to inflation problems and also putting pressure on the less developed countries that have borrowed heavily in dollars but are now struggling to pay back the money as their currencies explode.

โ€œThis could lead to more pressure to tighten monetary policy to prevent a significant currency devaluation and could also, as an additional tool, lead to foreign exchange intervention as has already happened in a number of countries,โ€ Borio said.

Graphics: World currencies in 2022: https://fingfx.thomsonreuters.com/gfx/mkt/znpnewgbbvl/Pasted%20image%201663548490760.png

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