World economy at critical juncture in inflation fight: BIS warms

Subject : economy

Section: Inflations

Key points:

Swiss-based Bank for International Settlements (BIS) has stressed the need for more interest rate hikes, warning the world economy is at a critical juncture as countries struggle to rein in inflation.
It noted that for the first time, across much of the world, high inflation is present along with widespread financial vulnerabilities.
A ‘soft landing’ is still possible but may be difficult.

BIS highlighted three related risks and challenges:

Inflation Control: Even with continuous rate hike over the last 18 months, inflation in many top economies remains stubbornly high. BIS recommends that countries should stop short term focus on growth. Instead monetary policy must now restore price stability along with fiscal consolidation.
Banking Stress: BIS has pointed out that increased borrowing costs as a result of the higher rates, also poses a threat to the banking sector, as the failure of the Silicon Valley Bank and collapse of Credit Suisse bank shows. It further pointed out, that the more delay in tightening of monetary policy, the longer will be the period of elevated rates.
High public Debt: High interest rates for a longer period will also significantly increase the debt service burden of countries. Already the debt levels are on the higher side. If interest rates get to mid-1990s levels the overall debt service burden for top economies would, all else being equal, be the highest in history.

Bank for International Settlements

Established in 1930, the BIS is owned by 60 central banks, representing countries from around the world that together account for about 95% of world GDP.
Its head office is in Basel, Switzerland.
The Bank for International Settlements is often called the “central bank for central banks” because it provides banking services to institutions such as the European Central Bank and Federal Reserve.
Its mission is to serve central banks in their pursuit of monetary and financial stability, to foster international cooperation in those areas and to act as a bank for central banks.
The Basel Committee for Banking Supervision (BCBS), while technically separate from the BIS, is a closely associated international forum for financial regulation that is housed in the BIS’ offices in Basel, Switzerland.
- The BCBS is responsible for the Basel Accords, which recommend capital requirements and other banking regulations that are widely implemented by national governments.
The BIS also conducts research into economic issues and publishes reports.