According to the BIS, the global economy is at a “crucial and dangerous” juncture in the fight against inflation

According to the Bank for International Settlements (BIS), the group of the world’s largest central banks, the global economy is currently at a “crucial and dangerous” point as countries struggle to control inflation.

Despite incessant rate hikes over the past 18 months, inflation remains stubbornly high in many top economies, while rising borrowing costs sparked the worst bank failures since the financial crisis 15 years ago, the Switzerland-based organization said in its annual report released on Sunday .

“The world economy has reached a critical and dangerous point. Policy makers face a unique set of challenges. Each of them is not new in itself; but their combination at the global level is,” the BIS said.

“On the one hand, central banks have tightened monetary policy to bring inflation back under control: prices are rising far too fast. On the other hand, financial vulnerabilities are widespread: debt levels – private and public – are historically high; Asset prices, especially real estate, are elevated. and risk-taking in financial markets was widespread during a period when interest rates remained historically low for an unusually long time. In fact, financial stress has already arisen.”

The global economy is expected to grow at a slower pace as continued monetary tightening to curb inflation is likely to slow development, the World Bank said in its latest Global Economic Prospects report.

Growth is forecast at 2.1 percent this year, up from 3.1 percent last year, before rebounding to 2.4 percent in 2024, the Washington-based lender said.

The tight global financial situation and subdued foreign demand are likely to weigh on growth in emerging and developing countries, it said.

This month the US Federal Reserve suspended raising US interest rates to assess the tightening cycle for the economy, but has signaled that it will hike again later this year.

The Federal Reserve has been aggressively raising interest rates since March of last year in an attempt to curb consumer prices, which are reaching a 40-year high in 2022.

Meanwhile, the Bank of England last week hiked interest rates by 0.5 percentage point to 5 percent, a day after figures showed inflation held steady at 8.7 percent in May.

The International Monetary Fund estimates global inflation will fall from 8.7 percent in 2022 to 7 percent this year and 4.9 percent in 2024.

In the short term, the global economy could overcome the obstacles it faces, the BIS report says.

But there are both short- and long-term dangers lurking along the way, and policies will be the deciding factor, the organization added.

“The priority of monetary policy is to bring inflation back to target. The longer inflation is allowed to persist, the more likely it is to become entrenched and the greater the cost of containing it,” the report said.

Central banks face three challenges in getting inflation back on target. First, there is limited evidence from historical statistical contexts when a transition to a hyperinflationary regime looms, the BIS said.

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Second, the monetary policy transmission mechanism is being clouded by the exceptional post-pandemic conditions, forcing many central banks to pause to better assess the impact of tightening so far.

Finally, there could be further strains on the financial system. When the stress is acute, active support for other regulatory and fiscal policies is needed to address it without jeopardizing the fight against inflation, the BIS added.

“Fiscal policy priority is consolidation. Consolidation would provide crucial support in the fight against inflation,” the report said.

“It would also reduce the need for monetary policy to keep interest rates high for longer, thereby reducing the risk of financial instability.”

Policymakers need to focus on two short-term challenges: restoring price stability and managing any financial risks, the BIS says.

Inflation could be more persistent than currently expected and has significantly weakened purchasing power. Wage demands have risen in a number of countries, the bank stressed.

“Historically high levels of private debt and high asset valuations may increase the sensitivity of private spending to higher interest rates,” it said.

Inflation worldwide – in pictures

In Islamabad, people line up to buy wheat flour at government-controlled prices. Pakistan’s economy was hit hard by a political crisis, as well as devastating floods and the global energy crisis, causing the rupee to plummet and inflation to be at levels seen for decades. AFP

A market in Rio de Janeiro. Brazil’s inflation ended 2022 in a sharp decline from double-digit highs seen throughout the year. Reuters

A market in Istanbul. Inflation in Turkey stood at 64.27 percent at the end of 2022, the country’s statistical institute said, while the independent group of inflation researchers ENAG calculated it at 137.55 percent. EPA

A Walmart in New Jersey. US Republicans and Democrats have different views on what the government needs to tackle most amid high inflation, a poll found. More Republicans cite gas and food prices, energy and immigration, while Democrats focus on healthcare, climate change and poverty. `

A used car dealership in California. Federal Reserve officials have hinted that it may be too early to announce victory over inflation. AFP

A person walks past a sign listing interest rates at a bank in New York. EPA

A woman walks past a shop in Berlin with her purchases. In December, euro-zone-wide consumer price growth slowed to 9.2 percent from 10.1 percent in the previous month, Eurostat data showed last week. `

Workers sit in front of a banner reading ‘Stop the inflation monster’ at the Burchardkai container terminal as they strike for higher wages in the port of Hamburg. Reuters

Price tags at a market in Nice, France. Reuters

Commuters cross Waterloo Bridge in London. The British Retail Consortium said spending at retail chains rose 6.9 percent year-on-year in December, but that was a far cry from consumer price inflation, which hit 10.7 percent in November. Reuters

Job seekers in Johannesburg. South Africa’s ruling party wants the central bank’s mandate to be expanded to support the economy and boost employment, in addition to its existing role of fighting inflation. Reuters

Social grantees stand in line at a post office as unemployment takes its toll in Meadowlands, South Africa. Reuters

“Higher interest rates, a turn in the financial cycle and an economic slowdown would ultimately result in higher loan losses. This in turn could lead to further strains in the financial system.”

The BIS also warned that there could be stress in the banking sector after monetary tightening.

The incidence increases significantly when initial debt is high, house prices rise or inflation rises more sharply – the current episode meets all criteria, it said.

Updated June 25, 2023 12:09 p.m