Central banks globally must act to break the higher inflation cycle, BIS sys, with just a small window of opportunity
Global central banks that missed the inflation surge must err on the side of breaking that cycle and only a "narrow path" remains to a soft landing as opposed to a worst-case scenario of global recession and stubborn high prices, the Bank for International Settlements said Sunday.
"The most pressing challenge for central banks is to restore low and stable inflation without, if possible, inflicting serious damage to the economy," according to the BIS annual report. "Real policy rates will need to increase significantly in order to moderate demand. Delaying the necessary adjustment heightens the likelihood that even larger and more costly future policy rate increases will be required."
The world economy faces the most significant stagflation risk since World War II following the invasion of Ukraine and the risk of a wage-price spiral should not be under-estimated, the BIS reported. Fragile financial markets, food shortages and destabilizing movement of capital from emerging markets add to the danger.
Losses on central bank assets bought up under balance-sheet expansion “could heighten political economy risks for central banks,” the report found. So far, heavily indebted governments have focused inflation relief on "untargeted measures, which are more costly and harder to reverse."
"In a worst case scenario, the global economy could be set for a period of stagflation, involving both low growth, if not an outright recession, and high inflation," the BIS said. "We may be reaching a tipping point, beyond which an inflationary psychology spreads and becomes entrenched. This would mean a major paradigm shift."
According to the BIS General Manager Agustin Carstens , central banks need to act "in a decisive way, in a timely way, and basically to prevent a full transition to a higher inflation regimes."
There is “a tight road” to a soft landing and a lot depends on how long price shocks last, he said, adding he doesn’t “feel comfortable” forecasting a U.S. recession at this time.