MNI: BIS Sees Wage-Price Spiral Risk, High For Long Rates

Central banks must keep tight policy longer than many investors expect amid the risk stubborn inflation turns into a wage-price spiral, the BIS said Sunday in its annual report, one of the starkest official warnings yet about the end of low-for-long rates. (MNI SOURCES: ECB To Hold Rates At Peak Into 2024)

“The key policy challenge today remains fully taming inflation, and the last mile is typically the hardest,” said BIS General Manager Agustin Carstens said in a statement introducing the report.

While there are mixed risks in the short run from financial instability fed by rising interest rates and a global economy shaken by the Ukraine war, over the longer term policymakers must wean themselves from a tendency to flood economies with stimulus in every downturn, the BIS said.

"A shift to a high-inflation regime would require self-sustaining wage‑price increases – a `wage-price spiral' – as workers and firms try to recoup their losses," the report said.

NO DE-ANCHORING YET

"A wage-price spiral would be even more likely should workers and firms seek not just to recoup past losses, but also to be compensated for future ones," the BIS report said. "While a de-anchoring is not yet evident, inflation expectations have edged up visibly in some cases and are generally above target."

Policy stimulus was too generous for too long through the pandemic, central banks continue to suffer from forecasting errors and inflation risks are mounting and could become more persistent, the report said.

"The biggest risk is to declare victory too soon. From a risk management perspective, policy rates may need to remain higher for longer to ensure that inflation continues to decline and stays low," the BIS report said. "The costs of a high-inflation regime are simply too high to take any chances."