Inflation fight risks central banks’ credibility and autonomy, BIS warns

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LONDON – The head of the Bank for International Settlements has warned that the credibility and independence of central banks around the world is at risk if high global inflation is not brought under control.

The Bank for International Settlements, often referred to as central bankers’ bank, has called for a forceful attack on inflation over the past year, after initially downplaying, like most major institutions, the impact of a coronavirus-era stimulus.

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Speaking in Brazil, Agustín Carstens, the bank’s managing director, said a tough response to inflation was key to maintaining confidence in central banks’ ability to keep economies on a level playing field.

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“If trust evaporates, then the ability to make effective public policies disappears,” Carstens said, explaining that this is the first time that younger generations in many countries have experienced inflation that has eroded living standards.

Once it takes hold, Carstens said, it can become increasingly difficult to stop inflation.

He added that refrigeration price pressures were necessary. Otherwise, the credibility of monetary policy, and the independent central banks responsible for implementing it, will be called into question.

Carstens comments that one of the fastest and most sweeping increases in global borrowing costs in history is showing signs of ending.

Financial markets are putting a big chance that the US Federal Reserve, which has driven global fees soaring for the past 18 months, will start cutting interest rates at the end of this year.

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Carstens said maintaining trust in the banking sector is as important as central banks, and took aim at cryptocurrencies, the “two-tier” risk of the monetary system, and the growing role of corporations beyond traditional banks.

“The need for more supervision and regulation of the non-banking sector has become even more urgent in light of recent periods of instability,” he said.

Returning to the battle for inflation, he said the process could run into hurdles, particularly as policymakers try to get it back to their preferred sweet spot, which is around 2% for the Fed and other major central banks.

Over the coming years, monetary policy should focus squarely on restoring inflation to levels consistent with central bank targets. (Reporting by Mark Jones; Editing by Christina Fincher)