Investors need to be ready for renewed global central-bank aggression should the inflation environment require it, according to a senior Bank for International Settlements official.
(Bloomberg) — Investors need to be ready for renewed global central-bank aggression should the inflation environment require it, according to a senior Bank for International Settlements official.
“There is nothing wrong with central banks slowing the pace of tightening and then adjusting it, possibly having to accelerate it again,” said Claudio Borio, head of economic research at the BIS. “The most important thing at this stage is not to declare victory too early.”
His commentary to journalists accompanied the publication of a quarterly review released on Monday by the Basel-based institution. The report observed the mis-match in past months between investor optimism that the global inflation shock may be subsiding and the heightened vigilance of monetary officials.
“The recent narrowing of the gap between central banks and markets is welcome,” Borio said, referring to market repricing this month in reaction to robust US employment and growth data. “But not all has changed. Some of the general features of the financial landscape of the past three months are still very much with us.”
Borio also expressed concern about large sovereign debts following the pandemic.
Already before the inflation surge, government borrowing levels globally were at “historical highs,” he said. “And because interest rates were at historical lows, the debt burden never felt so light.”
Borio noted that the shift in the monetary cycle to rate hikes laid the groundwork for tensions between governments and central banks that are now materializing. It’s “extremely important” that governments keep their “fiscal positions sustainable,” he added.
Other articles in the quarterly review highlighted the following:
- Tightening financial regulation in places from Europe to New Zealand is reducing the chances of financial market stress, ensuring better conditions for central banks to keep raising rates to fight inflation.
- While the strong dollar inflated costs of dollar-traded commodities in countries other than the US during much of last year, driving headline inflation, this effect has now waned and central banks’ attention has shifted to core price measures
- The Covid pandemic strained cross-border supply chains between companies, but remaining suppliers stepping in with larger shipping volumes cushioned the fallout.
–With assistance from Aline Oyamada.
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