According to the Bank for International Settlements, the world will enter a period of high interest rates and high inflation, as relations between the West, Russia and China worsen and post-pandemic effects reverse globalization.
Rising global energy and food prices mean an annual inflation rate of 5 percent in 60 percent of developed countries, and above 7 percent in more than half of developing countries.
As major economies such as the USA and the UK, as well as less developed countries begin to raise interest rates from historically low levels, a sudden acceleration seems to be needed for a fundamental paradigm shift to take hold.
“We may be on the verge of a new inflationary era”
“One of the critical messages is that we may be on the verge of a new inflationary era,” said BIS General Manager Agustin Carstens. We have to be open to the possibility that he may be going through. If this theory is correct, central banks will have to adapt themselves,” he said.
According to this thesis, the reason for the recovery in energy, commodity and food prices is the war in Ukraine. As supply chains suffer from both the pandemic and trade wars, the rising cost of living means workers will demand higher wages.
However, there are signs that consumers, businesses and financial markets are becoming more independent in their expectations of how high inflation will rise.
Carstens points to professional projections of inflation above 4.5 percent in the US and much of Europe over the next two years and above 3.5 percent in the remaining advanced economies.
What needs to be done quickly is to focus, as some have said since the 1970s, on how policymakers can change their mindset and stop inflation from spiraling out of control.
“Interest rates will need to be raised above neutral interest levels”
“This will likely require raising real interest rates above neutral interest levels to reduce demand,” Carstens said. He said they knew he was going to make it happen.
“But central banks have faced this situation before,” Carstens said.
The name at the top of the bank called on governments to resist balancing inflation and high interest rates.
“The key to sustainable growth cannot be expansionary monetary or fiscal policy,” Carstens said. “Many of the economic challenges we face today are due to our neglect of the supply policy side over the past few decades.”