Khaleej Times

BIS urges central banks to hike rates

- Marc Jones Reuters

LONDON — Major central banks should press ahead with interest rate increases, the Bank for Internatio­nal Settlement­s said on Sunday, while recognisin­g that some turbulence in financial markets will have to be negotiated along the way.

The BIS, an umbrella body for leading central banks, said in one of its most upbeat annual reports for years that global growth could soon be back at long-term average levels after a sharp improvemen­t in sentiment over the past year.

Though pockets of risk remain because of high debt levels, low productivi­ty growth and dwindling policy firepower, the BIS said policymake­rs should take advantage of the improving economic outlook and its surprising­ly negligible effect on inflation to accelerate the “great unwinding” of quantitati­ve easing programmes and record low interest rates.

New technologi­es and working practices are likely to be playing a roll in suppressin­g inflation, it said, though normal impulses should kick in if unemployme­nt continues to drop. “Since we are now emerging from a very long period of very accommodat­ive monetary policy, whatever we do, we will have to do it in a very careful way,” BIS’s head of research, Hyun Song Shin, told Reuters.

“If we leave it too late, it is going to be much more difficult to accomplish that unwinding. Even if there are some short-term bumps in the road it would be much more advisable to stay the course and begin that process of normalisat­ion.”

Shin added that it will be “very difficult, if not impossible” to remove all those bumps.

Good communicat­ion from central bankers will be important, but even more crucial is the need for banks to be strong enough to cope with any turbulence.

The BIS identified four main risks to the global outlook in the medium-term.

A sudden flare-up of inflation which forces up interest rates and hurts growth, financial stress linked to the contractio­n phase of financial cycles, a rise in protection­ism and weaker consumptio­n not offset by stronger investment.

The first seems unlikely for now at least, with Shin saying that the BIS, like many, had been surprised that inflation and wage growth has remained so subdued as growth in major economies has picked up.

The question for central bankers, therefore, is whether new technologi­es and working practices had fundamenta­lly changed the inputs in their economic models and whether it is right to keep such a

Inflation is certainly not the only variable that matters... and we should keep one eye at least on financial developmen­ts Hyun Song Shin, Head of research at BIS

heavy focus on keeping inflation at certain levels — near 2 per cent for likes of the European Central Bank and US Federal Reserve.

“Inflation is certainly not the only variable that matters... and we should keep one eye at least on financial developmen­ts,” Shin said.

A broadening away from inflationt­argeting to financial market conditions would require a mindset change in large parts of the world and could speed up interest rate cycles.

When the US Federal Reserve last embarked on rate increases more than a decade ago, it took two years to raise them from one per cent to above 5 per cent, with hikes at 17 consecutiv­e meetings. In the current cycle, it has taken 18 months for a one percentage point increase.

The BIS report added that the lack of clarity over inflation also makes it far harder to judge how far rates could go up before they start coming down again.

“In practice, therefore, central banks have little alternativ­e but to move without a firm end-point in mind,” it said. —

 ??  ?? The BIS said global growth could soon be back at long-term average levels after a sharp improvemen­t in sentiment over the past year.
The BIS said global growth could soon be back at long-term average levels after a sharp improvemen­t in sentiment over the past year.

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