By Marc Jones
LONDON (Reuters) – Central banks need to “get the job done” when it comes to getting inflation back under control, the Bank for International Settlements has said, urging them to avoid the mistakes of the 1970’s by declaring victory too early.
The BIS, dubbed the bank for central banks, said it was vital authorities didn’t repeat the stop-start cycles of the 1970s when interest rates had to be hiked to painfully high levels after attempts to lower them resulted in an inflation surge.
“Central banks have been very, very clear that at this stage the most important aspect is to get the job done,” the head of the BIS’ Monetary and Economic Department, Claudio Borio, said as part of a quarterly report.
“A cautious attitude designed to make sure that one is not declaring victory too early is the appropriate one”.
Global borrowing costs have risen at the fastest pace in decades over the last year as the Federal Reserve has lifted U.S. rates 450 basis points from near zero, the European Central Bank has hiked the euro zone’s by 300 bps and other parts of Europe and many developing economies have done even more.
There are concerns, however, that though inflation in many major economies is beginning to come down, it will remain stubbornly high due to volatile energy and food prices, as China’s economy reopens and as workers demand higher wages.
Data on Friday showed U.S. consumer spending increased by the most in nearly two years in January amid a surge in wage gains, adding to the view among economists that the Fed will continue raising its rates well above 5% this year.
In Europe too, the ECB is expected to extend what is already its steepest-ever streak of rate hikes next month with another 50 basis points hike that would take its key rate to 3%.
“What you don’t want to do at all costs is to repeat the stop-go policies of the 1970s when you are reversing (rates) and you then realise that the job has not been done,” Borio said. “Then you have to go back and forth.”
The BIS’ report also included research showing that rate rises are more likely to cause financial system stress when private debt levels are high, although tougher “prudential policies” can reduce the risk and give central banks more room for manoeuvre.
Another section looks at how higher commodity prices and the U.S. dollar exchange rate significantly affects the risk of stagflation – weak growth and high inflation – especially in developing market economies.
