MNI BRIEF: Central Banks Need Higher For Longer Rates-BIS

BIS Chief Agustin Carstens laid out a grim scenario for central banks including higher-for-longer interest rates that risk more financial turmoil and a clash with indebted governments, while in the long run policymakers must step back from a long era of naively chasing economic growth.

"The longer inflation lasts, the more likely is a shift to a high-inflation regime," he said. "Interest rates may need to stay higher and for longer than previously thought." it will be important to ensure that the tightening path consistent with lower inflation is not compromised by the immediate needs of the financial sector and not to succumb to "financial dominance," he said Monday in a speech at New York's Columbia University.

After a time when monetary and fiscal policy supported each other to pull economies out of the pandemic, they seem poised for conflict as high interest rates pinch budgets, he said. Governments will also feel pain from QE losses, and central banks face "material" pressure to become complacent on inflation or raise price targets, he said.

Monetary and fiscal policies have tested their limits since inflation was wrestled down in the 1970s and early 1980s, and officials now need to be less ambitious to keep the economy in a “region of stability” he said. The challenge is severe, with today marking the first time since World War II that high debt levels coincide with surging inflation, Carstens said.

Fiscal and monetary policy needs to be more symmetrical, and in particular not driving interest rates back into a low-for-long scenario, he said. "Arguably, there is room for monetary policy to be somewhat more tolerant of moderate, even if persistent, shortfalls of inflation from point targets once inflation settles at a low level."