Bank for International Settlements calls for quick, decisive action

A man rides his bicycle past the Bank for International Settlements BIS as it celebrated its 90th anniversary in Basel on October 22, 2021. FABRICE COFFRINI AFP LONDON - The Bank for International Settlements BIS, the Bank for International Settlements, has called for interest rates to be raised quickly and decisively to prevent the surge in inflation becoming more problematic.

The Swiss-based BIS held its annual meeting in recent days, where top central bankers met to discuss their current difficulties and one of the most turbulent starts to a year for global financial markets.

Inflation in many places is now its hottest in decades because of the soaring energy and food prices. The usual remedy of ramping up interest rates is raising the spectre of the recession, and even of the dreaded 1970s-style stagflation, where rising prices are coupled with low or negative economic growth.

Agust n Carstens, BIS general manager, said the key for central banks is to act quickly and decisively before inflation becomes more severe, as part of the body's post-meeting annual report published on Sunday.

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Carstens, the former head of Mexico's central bank, said that the emphasis was to act in quarters to come. The BIS believes that an economic soft landing is still possible, but accepts that it is a difficult situation.

Carstens said that the response of financial markets would be crucial, because a lot of it will depend on how permanent these inflation shocks are.

If this tightening generates massive losses, generates massive asset corrections, and contaminates consumption, investment and employment, that is a more difficult scenario. World markets are already suffering from one of the biggest sell-offs in recent memory as heavyweight central banks like the US Federal Reserve and from next month the European Central Bank will move away from record low rates and almost 15 years of back-to-back stimulus measures.

The US Treasury bonds, the benchmark of world borrowing markets, may have their biggest losing half of a year since 1788, and some analysts think that the global stock market is down 20 percent since January.

Carstens said that the BIS's recent warnings about frothy asset prices made the current correction not necessarily a complete surprise. There hadn't been major market disruptions so far, which was reassuring, he said.

A part of the BIS report published last week said that the recent implosions in the criptocurrency markets were an indication that long-warned about the dangers of decentralized digital money were now materializing.

The collapses are not expected to cause a systemic crisis, as bad loans triggered the global financial crash. Carstens stressed that losses would be sizeable and that the opaque nature of the universe fed uncertainty.

He said that the BIS didn't anticipate a period of widespread stagflation.

He said that although many central banks and the BIS underestimated how fast global inflation has spiraled over the last six to 12 months, they weren't about to lose credibility overnight.

You can argue a little bit about an error in timing of certain actions and responses of the central banks here. Carstens said that the central banks have responded very agile in a very agile fashion and that by and large I think that they have responded in a very agile fashion.

I believe that central banks will prevail at the end of the day, and that would be good for their credibility.