Interest rates may need to stay higher for longer, warns BIS
The Bank for International Settlements, an international financial institution owned by members of central banks, has warned that interest rates may need to stay higher for longer than the public and investors expect.
The Switzerland-based institution released its annual economic report on Sunday, which showed that the work of central banks to conquer inflation is far from over.
Last month, the South African Reserve Bank’s Monetary Policy Committee hiked the repo rate by 50 basis points, a move in line with the decisions of its international peers.
While most economists supported the move, they also said central banks worldwide were nearing the end of the rate hiking cycle.
But the BIS report shows that the last leg of the journey to restore price stability will be the hardest.
Although the central bank body acknowledges that inflation has started to subside from a multi-decade high, it said the gains made so far were due to the supply chains easing and commodity prices falling.
However, the labour markets are still tight, and service price growth has proved harder to tame.
BIS general manager Agustín Carstens said central banks are determined to conquer inflation, even if the last mile to price stability may be the most challenging.
"The critical policy challenge today remains fully taming inflation, and the last mile is typically the hardest. The burden is falling on many shoulders, but the risks from not acting promptly will be greater in the long term.
“Central banks are committed to staying the course to restore price stability and protect people's purchasing power," said Carstens.
"While central banks' goals are clear, the path is uncertain. The pandemic, in conjunction with broader structural changes, disrupted the usual relationship between interest rates, growth and inflation. With models providing less reliable signposts, judgment is of the essence.
“Central banks may think they have done enough, only to find they need to tighten further. In the meantime, more financial stresses could emerge.”
Meanwhile, the Head of the BIS Monetary and Economic Department Claudio Borio warned that longer-term government debt trajectories pose the biggest threat.
"The current tensions are the culmination of decades of reliance on monetary and fiscal policy as de facto engines of growth.
“Overcoming this 'growth illusion' fallacy and finding a coherent policy mix requires a change in mindsets, recognising the limitations of stabilisation policies.”
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